Small business owners in the UK have been dealing with a lot lately. There is now a new change on the horizon. The Government has decided to increase National Insurance payments in the coming tax year. What’s happening and what does the UK National insurance change mean for your small business?
National Insurance increase in figures
Prime Minister Johnson unveiled the plan to increase the UK National Insurance last September. The changes will apply from April 2022. They’ll affect employees, employers, and the self-employed. The plan is twofold:
- From April 2022, National Insurance across the UK will increase by 1.25 percentage points.
- From April 2023, you’ll pay the extra 1.25 percentage points through a separate Health and Social care levy. It will also apply to state pensioners.
It’s vital to note the increase is in percentage points, not as a simple percentage increase.
How will the UK National Insurance change impact small UK businesses?
The NI increase will impact UK businesses and the self-employed. Experts have warned the rise could disrupt hiring plans and put people out of business altogether. How the NI increase affects you depends slightly on your business.
If you’re employing other people, then your employees will cost more. You pay a percentage of Class 1 National Insurance contributions for each employee. How much you pay depends on their salary.
Let’s say you’re a business owner outside of London. If you have a single staff member on the living wage, then you’re currently paying £2,359.80 in National Insurance contributions. With the 1.25 percentage point increase, the cost of the employee will increase to £2,654.68.
Paying this extra cost can add pressure to your payroll. If you have several employees, the costs can add up. If you were thinking of hiring more people, you might now want to reconsider it.
If you’re a sole trader, you’ll feel to increase directly in your salary. You pay taxes based on income through the Self Assessment system. Because the tax is based on your income after business expenses, the change can have a more direct effect. Many UK small business accountants warn about the jump in your Class 4 National Insurance contributions.
You’re currently paying 9% in National Insurance contributions if your annual profit is over £9,568. In the next tax year, the rate will increase to 10.25% and the limit on which you need to pay to £9,880. For the tax year 2023/24, you’ll pay 9% and the 1.25% Health and Social Care levy.
If you’re earning over £50,270, your contributions will go up from 2% to 3.25%.
What can your business do about the NI hike?
Small businesses are still navigating out of the economic hardships caused by the COVID-19 pandemic. The news that your National Insurance expenses increase isn’t particularly welcoming.
But preparation is the best way to ensure the change won’t lead to further financial trouble. Our UK accounts recommend you:
1. Check if the increase applies to your employees
To recap, you’ll start paying the 1.25% increase in contributions from 6 April 2022. You’ll then pay the increase via a separate 1.25% levy after the first year. The levy will also apply to employees who are over State Pension age.
However, you might not be liable to pay the extra rise if you meet certain conditions. The change won’t apply if your employee earns less than £50,270 (£25,000 for Freeport employees) per year and is a recipient of one of the following reliefs:
- Apprentices under the age of 25
- Employees under the age of 21
- Armed forces veterans
2. Check if the increase applies to you as self-employed
If you are self-employed, then the 1.15% increase in NI contributions won’t apply to you if:
- You only pay Class 2 National Insurance contributions.
- You’re above the State Pension age before 6 April 2022 with profits over the Lower Profits Limit. You’ll still need to pay the separate 1.25% levy from 6 April 2023.
If you’re a low-earning freelancer below the Class 4 threshold of £9,568, then the increase won’t apply. You’ll continue paying £3.05 a week on annual earnings over £6,515 and below the Class 4 limit.
3. Calculate the cost
Once you know the conditions, you want to calculate the cost. See how much you’ll end up paying with your current income and/or employees. If you’re thinking of hiring more, consider what this would mean for your NI contributions.
4. Review your spending
When you get a clearer picture of how the increase will impact your small UK business, you can prepare for it. Businesses should regularly review their spending. You could consider cutting back on things like defined contribution pensions. It won’t be easy to find these little ways to control your spending. But it’s always worth reviewing your spending habits.
5. Talk to a UK small business accountant
If you’re not quite sure what the changes mean for your small business, talking to a professional UK accountant can be a great idea. Good online UK accountancy can help you understand the new system without breaking the bank. They can also help you find ways to prepare your business for the additional costs.
Our accountants can help you ease your business into the new National Insurance contributions. Together we can look at your finances and make sure you’re ready to navigate the increase. Contact us for a chat today!