How will the National Insurance hike affect small businesses?

Finance and legal

4 March 2022

You may have heard that the National Insurance tax is going to be raised this year. We’ve gathered together the main things you need to know about National Insurance, why it’s rising and the steps you can be taking as a small business to prepare for the rising cost of having employees.

What is National Insurance?

The National Insurance (NI) tax was introduced in 1911 as a way to provide a fund for people who had lost their jobs or needed medical treatment. Today, the money raised by NI is used to pay for the NHS, benefits, and state pensions.

If you’re an employer or employee, the NI is based on earnings and you’ll both contribute to it. This is automatically deducted from employee waged via the pay as you earn (PAYE) tax code and sent directly to HMRC.

If you’re self-employed, the NI is taken based on your profits and you’ll usually pay your NI during your annual self-assessment tax return.

There are several different National Insurance class types and which one you’ll be in will be affected by your employment type. Employers and employees pay the Class 1 NI rates while the self-employed are usually Class 2 or Class 4 depending on their profit levels.

Why is National Insurance rising?

The NI hike is being implemented as a way to raise an estimated extra £36 billion for the NHS over the next three years. The goal is that this extra resource will help to cut down the current hospital wait times.

While the government had initially planned to avoid raising income or national insurance taxes to deal with ongoing social care issues, the COVID-19 crisis added too much pressure to the NHS system and has pushed a more immediate funding solution.

The tax is being levied across the whole of the UK and the income from this will be distributed across the four nations, particularly looking to deal with the NHS treatment backlog and social care reform in England.

When will the rise happen and how much will it be?

Starting from 6 April 2022, there will be a 1.25% increase in National Insurance for both employees and employers. This means that the rates will be affected as such:

  • The rate on earnings between £9,564 and £50,268 will rise from 12% to 13.25%
  • The rate on earnings over £50,268 will rise form 2% t0 3.25%
  • Employer contributions for employees earning more than £170 per week will rise from 13.8% to 15%

This will affect the self-employed or freelancers a bit differently as they pay national insurances based on profits, not wages.

What are the anticipated effects on employment?

There are concerns from various economic and small business groups that the new tax will slow job growth or even raise unemployment. The Centre for Economics and Business Research have said that if the additional NI costs of having staff put SMEs off hiring new staff members, it could cost the UK 350,000 jobs. Meanwhile, the Federation for Small Businesses (FSB) estimates that 50,000 jobs in SMEs are at risk as companies will have to consider redundancies to stay afloat.

While prime minister Boris Johnson said that 40% of businesses would be affected because of the employment allowance, which waives the first £4,000 of employer NICs for businesses with less than £100,000 of total NICs liabilities, FSB estimates that the total annual cost of the hike to the small business community is set to be £5.7 billion.

How will the increase affect small business employers? 

Ultimately, these changes will make it more expensive to employ staff. Given that small businesses make up about 99% of the UK’s industry, they will bear the brunt of the funds being raised by employers.

Estimates show that National Insurance currently costs about £2,359.80 per year for a single employee who is being paid a living wage outside of London. With the 1.25% increase this will now rise to be £2,654.68 per year. While a rise of £241.87 per year doesn’t sound like much, if you have several employees it can add up fast.

According to FSB, they’re anticipating that an SME with about eight staff will be paying an additional £3000 in National Insurance per year. This, added to the ongoing energy crisis and recent supply chain issues, creates a bleak outlook for small business owners.

While you can’t avoid the rise in the national insurance taxes, there are a few steps that you can be taking to prepare your business and your employees.

What can small businesses do to prepare? 

Analyze the budget 

The first step should be to take a look at your budget and understand how the changes will affect your company's bottom line. Will you be able to handle the higher NI contributions comfortably or will you need to make some changes? Consider speaking to an accountant to get a strong understanding of what your finances will look like when the NI hike takes place. Getting to grips with your books and your budget will help you prepare and decide what next steps to take in order to reduce your business costs.

Prepare your staff 

Employees might not be aware of the changes that are coming and the fact that their contributions will be on the rise as well. It may be worth notifying any staff of the changes so that they understand why their payslips may look a little different after April and so they can update their personal budgets. 

Communicate with customers 

There's a change that if the new NI contributions are squeezing your profit margins that you'll have to raise prices. While this is usually a last resort option, if it's one you're opting for, be sure to give customers plenty of notice as well. These changes will be felt by everyone in the working world, so giving any customers time to adjust their finances is important as well. If approached correctly, you should be able to adjust the cost of your products or services without too much fanfare. Read our guide on how to communicate price chances to customers.

Review your pension set-up 

There are two main ways that pension contributions are approached:

  • Relief at source method: contributions are deducted from the employee's net salary, after income tax has already been deducted.
  • Net pay method: the full amount of the pension contribution is taken from your pay before tax is deducted. Often this is done through a salary sacrifice scheme and can help save some national insurance tax.

A salary sacrifice scheme allows you to give up some of your salary in return for a pension contribution from your employer. This helps because you’re paying taxes on a reduced income amount even though you’re getting the same amount paid into your pension pot. Both employer and employee can save a bit of money from this. If you decide to offer a salary sacrifice model, you should inform employees about any affects this may have on their benefits given that their salary is technically lowered by this type of contribution.

If you're looking to take on your first employee, consider an apprentice 

If you don't have employees yet but were hoping to take someone on in the future, consider training an apprentice instead. If you have the time to train someone while they work for you, apprenticeships can be a great way to get your first employee. In exchange for spending 20% of their employed time being trained, their wages tend to be slightly lower and, for apprentices under 25, you may not need to make National Insurance contributions

You're contributing to the economy by training someone in a new skillset and, should the apprentice master all the skills you're teaching them, you'll be able to take on a higher workload. If you decide to keep them on as a full employee once the apprenticeship ends, you can feel certain that you'll have a solid employee that has all the skills you’re looking for.

Look for other ways to reduce costs

Whether it’s cutting down on your energy costs or claiming all of your allowable expenses, you can look to cut costs in other parts of the business to prepare for the rise in National Insurance costs. A few things you can look out for are:

  • Sector specific tax incentives: Certain sectors have specific tax relief schemes that may help if you are eligible for them. Just a few to look out for are the creative industries tax relief, research and development tax relief, retail discount, or small business rate relief. These are just the national schemes, but there may be local schemes as well, so be sure to check with your local authority as well.
  • Green energy tax cuts: As the UK works towards their Net Zero goals, more and more incentives are appearing for businesses that are working towards greener business practices. The types of financial support are very varied, but the UK Government Green Business Funding and Zero Carbon Business Grants List are a great first port of call for finding out more about what’s available to you.
  • Allowable Expenses: Did you know that there are certain business expenses you can deduct from your tax bill? Whether you’re self-employed or run a limited company, understanding allowable expenses means that you won’t pay an more tax than you have to.
  • Employment Allowance: Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £4,000. You’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £4,000 has gone or the tax year ends (whichever is sooner). Find out more on the UK Government website.

Make sure you’re prepared

Given the many challenges that small businesses have faced throughout the pandemic, the rise in national insurance is just another hurdle. However, taking early action and preparing properly for the changes will help you minimise the impact on your business.

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