What the National Insurance Increase Means for You

11th October 2021

When it comes to payslip deductions, Income Tax is likely the first thing that comes to mind, but National Insurance Contributions (NIC) also mark a significant deduction from our monthly earnings.

Whilst the NIC increase will impact all individuals, the tax hike will also have widespread effect on businesses and investors, as the burden on companies increases, potentially resulting in lower profits and returns for shareholders.

How will your NIC increase?

From April 2022, National Insurance Contributions (NIC) will rise by 1.25% for both self-employed and employed individuals in the United Kingdom.

The increase is expected to raise £12bn a year, which will go towards funding health and social care costs to ease the pressure on the NHS after the unprecedented stress of the coronavirus pandemic.

In April 2023, NI will return to its current rate and the extra tax will be collected as a new ‘Health and Social Care Levy.’ This Levy will also be paid by those above the State Pension Age, unlike the temporary NIC raise from April 2022.

How will the NI increase impact individuals?

The increase in NICs will initially affect everyone over the age of 16, but below the state pension age. For those who are employed, anyone earning over £184 per week will be affected. For the self-employed, those earning profits of £9568 or more per year will be impacted.

The amount that you earn will affect how much you contribute to the National Insurance raise. Below, we have broken down the different earnings and contributions expected:

• 20,000 per year – £130
• £30,000 per year – £255
• £50,000 per year – £505
• £80,000 per year – £880
• £100,000 per year – £1,130

These amounts will be made in addition to your existing NICs.

How will this affect employers and SMEs?

For businesses, the 1.25% increase will apply to employer contributions.
In the short term, the increase in NI will have the most impact on small to medium enterprises, affecting the cost of recruiting new staff, and potentially leading to cuts in other areas, such as employee benefits or training. With the cost of recruitment increasing, businesses are less likely to invest, hindering the growth of the UK economy as a result.

Employers pay a percent of Class 1 National Insurance for each employee, depending on how much they earn. The increase in NI could therefore raise recruitment challenges in the aftermath, leading to losses in business’ finance.

How will this affect the self-employed?

For self-employed company directors, the 1.25% increase in NI will affect how they pay themselves through dividends.

From April 2022, those in receipt of dividends will retain the £2,000 tax-free dividend allowance but will see 1.25 percentage points added to each rate of dividend tax above this.

How will this affect investors?

From 6 April 2022, the tax paid on dividends above the £2,000 allowance will also increase by 1.25%. Tax on dividends, however, will only start being paid if your total income is more than your personal allowance, and you also exceed the dividend allowance.

How can Edwards Accountants help?

Whether you’re a business owner or an investor, an awareness of matters and legislation concerning National Insurance is vital.

Since 2013, HMRC have implemented schemes to counteract tax avoidance, with their General Anti-Abuse Rule (GAAR). Consequently, it is important to ensure that professional advice is sought so that all compliance matters are properly dealt with.

As experienced chartered accountants and taxation experts, we would be delighted to advise on any compliance matters relevant to your business, so please contact us to speak to one of our trusted team members.

For our West Midlands Offices:

Tel: 01922 743 100

Email: aldridge@edwardsaccountants.co.uk