In his recent Spring Statement, Chancellor Rishi Sunak set out the Government’s tax plan to support the UK economy, businesses and families in the short and medium term.
Key measures announced include:
- An increase to the National Insurance Primary Threshold for Class 1 NICs and the lower limit for Class 4 NICs from 6 July 2022, aligning it with the equivalent income tax personal allowance, which is set at £12,570 per annum.
- From April 2022, self-employed individuals with profits between the Small Profits Threshold and the Lower Profit Limit will not pay Class 2 NICs, while allowing individuals to be able to continue to build National Insurance credits.
- The Employment Allowance will be increased by £1,000 from 6 April 2022 to £5,000.
- An immediate reduction in duty on petrol and diesel by 5p per litre, for 12 months.
In her recent blog, my colleague, Emma Arthurton, commented on the impact of the new Health and Social Care Levy on National Insurance contributions.
New Health and Social Care Levy
The new Health and Social Care Levy due to take effect on 6 April 2022, will initially be used to support the NHS and in due course general health and social care in the UK.
As a result, there will be a temporary rise in the rates of National Insurance contributions (NIC) payable on all earnings above £823pm (£190pw). An increase of 1.25 percentage points will be applied to Class 1, 1A, 1B (and Class 4 for self-employed) NICs. It’s important to note that from 6 April 2023, the NIC rates will revert to the pre-2022 rates of 12% and 2% for employees and 13.8% for employers, and a new Health and Social Care Levy of 1.25% will be introduced as an additional deduction from gross pay to be shown separately on payslips. This means employees who don’t pay Class 1 NIC may still pay the levy from April 2023, for example workers who are at state pension age.
The rise in NICs is not actually a 1.25% increase, but a 1.25 decimal point increase, meaning the actual percentage impact is far greater to both employees and employers alike.
Employees will see their NIC rate rise from 12% to 13.25% on the band of income between £823 and £4,189 per month (which is effectively a 10.4% increase) and from 2% to 3.25% on any income above £4,189 per month (a 62.5% increase). With personal allowance, student loan and tax band thresholds not moving at all for many within the UK (particularly for England, Wales and Northern Ireland), this will be an additional blow to the pockets of many individuals as we move into the 2022/23 tax year.
For employers, employer NIC will rise from 13.8% to 15.05% (a 9% increase). At a time when businesses are still fighting to recover from the effects of the pandemic, alongside rising inflation and the withdrawal of COVID support packages, it’s clear it will unfortunately be another tough year for many.
One way in which employers could help reduce this burden is to introduce a salary sacrifice pension scheme for their employees. This is where an employee agrees to exchange their pay by an amount equal to their pension contributions, and in exchange, the employer then agrees to pay the total pension contributions. So, any contributions paid will be treated as employer only.
When paying pension contributions in this manner, both the employees’ and employers’ National Insurance contributions, and the Health and Social Care Levy are calculated based on salary after the sacrifice has been deducted, thus reducing the impact of the increase.
This is something which needs careful consideration and planning by the employer, however it can prove to be a cost saving tool for both the employee and employer.
Spring Statement main points
My colleague Tessa Brown’s recent blog further explores the main points from the Spring Statement.
Measures for employers and employees
Whilst significant tax changes are normally tabled for the Autumn Budget, given the unprecedented rise in the cost of living, there were calls on the Chancellor to use this statement as his opportunity to help those most affected.
Although he chose not to postpone the forthcoming 1.25 percentage point rise in the National Insurance (NIC) Rates, a significant increase touching even the lowest of earners, he did make changes which will impact both employees and employers that, seemingly, offset some of this increase.
Increase in Class 1 NIC Primary Threshold
The Class 1 NIC Primary Threshold, the rate at which employees start to pay NIC on their earnings, is being aligned with the personal tax thresholds, from July 2022.
This means that, from July 2022, workers earning under £12,570 annually (£1,048 monthly), and on a standard PAYE tax code, will pay no tax or NIC.
Between April 2022 and June 2022, the monthly threshold is £823, as announced previously.
The Chancellor has stated that, for the typical employee, this will represent an actual tax saving of £330 annually, even after accounting for the increase in NIC rates from next month.
For employees that pay NIC on an annual basis, like directors, the limits for the year are prorated, so the annual limit for 2022/23 will be £11,908.
Moving forward, the Primary Threshold will remain aligned with the Personal Tax allowance, which is currently frozen at £12,570 until 2026.
There’s no increase in the Secondary Threshold, which is the limit at which employers contribute NIC on an employee’s earning, therefore this cash saving is purely for employees.
Increase in the Employment Allowance
The Chancellor will be increasing the Employment Allowance for qualifying businesses from £4,000 to £5,000 from April.
It’s estimated that this will benefit 30% of all businesses.
Decrease in the basic rate of income tax
From 2024, employees may see an increase in their pay packet, as a result of a 1% reduction in the basic rate of income tax. While this was a clear aim for Sunak, the documentation behind today’s announcement does contain certain fiscal principles, such as debt continuing to fall and no borrowing for routine spending, that will have to be met before April 2024 for this to come into force.
If you have any queries, you can contact me on 01473 833411 or [email protected].
Peter is the Guild’s accountant.
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