The impact of a National Insurance increase

Published by Sandra Smith on

The impact of a National Insurance increase

The Government has finally announced its plan to increase the national insurance (NI) rates in order to fund health and social care.

With all the challenges currently being faced by small businesses from the impact of the pandemic and Brexit, an increase in (NI) will provide a further pressure for those trying to grow their business. The change will see both employers and employees paying an additional 1.25% in NI. The purpose of this increase is to raise much needed funds of around £36bn to support the NHS and to cut waiting times.

NI is a tax paid by employers and employees on earnings, it is automatically deducted during the payroll process via PAYE (pay as you earn) and is paid straight to HMRC. Anyone over the age of 16 and earning more than £164 per week, or if they are self-employed and making a profit over £6,515, automatically pay NI. Usually, individuals stop paying NI once they reach retirement age, however this increase in tax will also apply to those past retirement age. The new rules will come into place from 6th April 2022.

For small businesses this increase will make employing staff more expensive. For those that are self-employed, they pay either class 2 or 4 NI, which is taxed on income after business expenses. As a guide anyone earning £20,000 pa will pay an extra £130 whilst those on £100,000 will see an increase of £1,130 per year.

Directors and shareholders will also face a similar 1.25% hike in the rates of tax paid on dividends (from April 2022). The increase will see basic rate taxpayers tax increasing from 7.5% to 8.75%, higher rate taxpayers from 32.5% to 33.75%. Additional rate taxpayers will also see an increase from 38.1% to 39.35%. Currently there is a £2,000 tax-free dividend allowance (which will continue). When the personal allowance and tax-free dividend is taken into account then most will not be affected by this change.

With many businesses already struggling to recruit, an extra increase on NI could lead to businesses reviewing other benefits they offer in order to offset the costs. This could result in a freeze on recruitment or provide a further challenge for those that need to grow and increase their staff count.

The Chancellor Rishi Sunak has also announced that the Autumn budget will take place on 27th October 2021. It will be interesting to see what initiatives are announced to support businesses through this tough period.

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