1.25% National Insurance Increase: How will it affect my business?

In recent news it was announced that the UK government would increase National Insurance and dividend tax to fund a struggling NHS and a social care system which has been described as “past breaking point”. We look at how it will affect your business.

The change will take place from April 2022 and will see business and individuals pay an extra 1.25 percentage points or 1.25p per pound . This would be an annual increase of £255 for an employee with a salary of £30,000. The increase is expected to raise £12bn a year which will be used to ease the pressure COVID-19 has put on the NHS and later to increase spending on social care. The rise has caused controversy as the government promised as part of its manifesto in 2019 that it would not raise national insurance. After two years of pandemic driven excess spending the Government feel there are few alternatives.

How will this affect my business?

The increase will apply to:

  • Employees – Class 1 National Insurance
  • Self employed – Class 4 National Insurance
  • Employers – Secondary Class 1, 1A and 1B National Insurance

Businesses are trying to recover from the impact of COVID-19 and already having difficulty recruiting staff. The National Insurance rate change and inflation is likely to make the recruitment process more costly.

For clients trading as a limited company the £2,000 dividend allowance will remain. However all dividend tax bands will be increased by 1.25 percentage points, seeing the highest bracket rise up to 39.35%. Critics are concerned that this could see a decrease in investment.

From April 2023 when systems are updated National Insurance will return to the current rates and the extra 1.25p per pound will instead be collected as the Health and Social Care Levy. This will be shown separately from National Insurance. It will will appear as an additional entry on tax returns and pay slips. Individuals working past state pension age do not currently pay National Insurance but they will have to pay the Health and Social Care Levy.

Experts have claimed that in the future more is required to match the spending on the NHS and Social care. Time will tell whether it will be a success.

What can I do?

To prepare for the change you can work out how much it is likely to cost your business. Ensure you have a good understanding of your current financial position and cashflow requirements.

If you have employees your payroll software will need to be updated to calculate the additional levy.

If you are looking to prepare for the change or would like any other financial advice, then please speak to our payroll or financial advisory team who are here to help.

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