As part of the Health and Social Care Levy, a 1.25% increase to National Insurance Contributions (NIC) will be introduced for employees, and employers from 6th April 2022.
Both Employee’s and Employer’s NIC will increase on wages, salaries and bonuses paid by companies, including amounts paid to directors and shareholders, and Employer’s NIC on benefits in kind provided to employees will also be increasing.
This NIC increase is temporary, with current levels being reverted to on 6 April 2023. However, from 2023, this Health and Social Care Levy will be separated out from other NIC’s with the increase legislated separately. This additional cost to employers and employees is here to stay beyond the 2022/23 tax year.
Initially outlined at Autumn Budget 2021, in recent months there have been calls to postpone this increase, as many individuals struggle with the rising cost of living. Despite this, the Government have confirmed their intention to go ahead with the increase.
The impact for employers and their employees
The 1.25% increase in NIC for employees and employers will result in the following changes in 2022/23 tax year:
- Employees: The Class 1 Employee NIC rate will increase from 12% to 13.25% on all salaries/wages between £9,880 pa (£823 per month) and £50,270 pa (£4,189 per month). This is an increase £504 pa of NIC deductions (£42 per month) for an employee earning £50,270 pa, and £251 pa additional NIC (£21 per month) for an employee earning £30,000 pa. For all salaries/wages above £50,270 pa (£4,189 per month), Class 1 Employee’s NIC will be charged at 3.25% instead of 2%.
- Employers: For all salaries paid over £9,100 (£758 per month), the Employer Class 1 NIC rate will rise from 13.8% to 15.05%. As is currently the case, there is no upper threshold for Employer’s NIC, and 15.05% Employer NIC will be due on all salaries/wages over £758 per month.
- Employers: Employer Class 1A NIC charged on benefits in kind declared on an employee’s Form P11D will increase from 13.8% to 15.05%.
- Employers: Where employers have a PAYE Settlement Agreement (PSA) in place with HMRC, to meet the tax liability arising on small irregular benefits provided to employees during the tax year, the Employer Class 1B NIC due in the PSA liability calculation will increase from 13.8% to 15.05%.
The upcoming increases pose a number of challenges to employers and their employees. All employees earning over £9,880 pa will have lower take home pay, and employers will also face significantly more NIC liabilities.
Tax planning opportunities to offset the NIC increase
Employers should now consider the opportunities available minimise the increase of NIC, including:
Accelerating payment of bonuses
Consider if bonuses can be declared and paid so that they fall into the February or March payroll and are subject to current lower NIC rates for both employees and employers.
Maximise dividends
Alongside increases to NIC on salary, a 1.25% tax increase is also being applied to dividends paid to company directors and shareholders from 6th April 2022. As such, employers should consider if there is an option to declare and pay an increased dividend in February or March which will be subject to the current lower tax rate.
Consider introducing a pension salary sacrifice arrangement
If your employees contribute to the pension fund, consider introducing a pension salary sacrifice arrangement which will create NIC savings for both employees and employers. With pension salary sacrifice, an employee sacrifices an amount of pay equivalent to their normal employee pension contribution. In exchange, the employer increases the employer pension contribution by the same amount.
Employees do not receive NIC relief on their pension contributions. This means that reducing an employee’s pay for PAYE tax/NIC and substituting this with an equivalent employer pension contribution (which is NIC free) creates NIC savings for both the employees and the employer.
As a result, employees’ take-home pay (net of tax and NIC) will increase, and the Company’s Employer NIC liability will also reduce. The total pension contribution made to the pension scheme remains unchanged.
As NIC rates increase, pension salary sacrifice becomes an even more attractive arrangement to have in place for your employees.
How we can help
At PKF Smith Cooper our Employment Tax team have been implementing pension salary sacrifice arrangements for clients for many years. We work with you to ensure that our experience in implementing these arrangements provides you with practical and commercial solutions that deliver maximum savings and meet HMRC’s expectations.
For expert advice on implementing a pension salary sacrifice arrangement, or any other planning opportunities, please get in touch with a member of our employment tax team.
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