National Insurance changes small businesses

National Insurance changes – what do they mean for small businesses?

What impact will the recent National Insurance changes for the tax year 2022-2023 have on small businesses? Business consultant Gemma Dale delves into the changes and how they'll affect SMEs.

From 6th April 2022, National Insurance contributions increased by 1.25%.

Changes to employee contributions

Personal rates vary depending on the category of contribution that the employee is required to make and their individual earnings, but most employees will have increased contributions of 13.25% (previously 12%). This rise will be used to fund the NHS, health and social care in the UK. It has been referred to as a ‘health and social care levy’ and is expected to raise £36 billion over three years. The increase will apply to both employed and self-employed individuals.

How this will affect employers

As with all other legally required deductions, employers will deduct these additional sums directly from the employee’s pay. In practice, this increase means that from the beginning of the new 2022 financial year, anybody earning more than £9,880 a year will pay 1.25p National Insurance per pound that they earn.

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Changes to employer contributions

There is an impact on employer contributions too. Currently, most employers pay 13.8% National Insurance contributions for employees who earn over £170 per week. This will also have increased to 15.05% from April.

Not all organisations have to pay National Insurance contributions, however – some smaller businesses do not need to if their liabilities fall below a certain threshold. However, for many businesses, this rise will certainly make it more expensive to employ people.

The July 2022 update

As well as the changes outlined above, the government made another National Insurance amendment in the recent budget – this one taking effect in July 2022. The employee threshold where National Insurance payments need to be made (currently £9,880) will increase to £12,570. This second change will allegedly see employees paying an average of £330 less National Insurance annually and will offset some of the April increase.

For employees, this means that they will see an immediate impact on take home pay in April, but then some of the increase will be offset later in the year. Employers too will see an immediate rise in the costs of their contributions and therefore the costs to do business.

What do these changes mean for small businesses?

What do these changes mean for small businesses

There is no doubt that this increase is unpopular with both employees and employers, coming as it does at a time of increasing cost of living, rising inflation, and for many businesses a period of difficult trading conditions following the pandemic.

There have been concerns raised too that this change will hit small businesses, threatening recovery, economic growth, and jobs. The Federation for Small Businesses has warned that some employers might even have to make redundancies because of these changes.

Regardless of these very real concerns, these changes are now inevitable. There are three simple steps that employers can take to prepare:

1. Make sure employees are aware of the changes before they get paid

Not everyone will have seen the headlines about this increase, so it is a good idea to pre-warn people about the potential impact on pay. Handy calculators are available online so that employees can model their specific personal impact.

2. Work out the impact on your business

Calculate the additional cost per employee, per annum, and how these impact upon your overall budget and financial position. This can then help you to forecast properly and take steps to address that impact.

3. Identify any opportunities to save costs or increase revenue

Once the impact is known, identify how it can be mitigated. For some businesses, this might mean an increase in prices, although this should be considered carefully, as it could result in reduced demand for services in some cases. Consider too any opportunity to save costs – and don’t forget to engage your employees in these conversations. They may just have some new, valuable ideas that can help.

The government have published the rates and thresholds (considering both changes) for the forthcoming financial year.

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Written by Gemma Dale

Gemma Dale is an experienced senior HR professional, CIPD Chartered Fellow, HEA Fellow, and a regular speaker and writer on a variety of HR topics. Gemma is the co-author of the book 'Flexible Working' published by Kogan Page in 2020. She is also a lecturer in the Business School at Liverpool John Moores University and runs her own business, The Work Consultancy.

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