The Government’s decision to increase national insurance contributions (NIC) by 1.25 per cent from April 2022 has come at a tricky time for SMEs, many of which are struggling with the operational issues and the fallout of the pandemic.
However, adopting a smart approach to spending and considering employee remuneration packages carefully could help employers to mitigate cost increases as they move towards recovery.
Earlier this week, the Prime Minister confirmed that from April 2022, there will be a temporary 1.25 per cent increase in class 1 (employee) and class 4 (self-employed) NICs paid by workers, as well as a 1.25 per cent increase in class 1 secondary NIC paid, which are paid by employers. This takes the current main NIC rate from 12 per cent to 13.25 per cent for employed and to 10.25 for self-employed individuals earning above the class 1 primary threshold and the class 4 lower profits limit (currently £9,568 in 2021/22) respectively. Employers will also pay the additional 1.25 per cent for employees earning above the class 1 secondary threshold (£8,840 in 2021/22). The temporary increase in National Insurance will be replaced by a permanent Levy in 2023.
As Andrew Brookes is a senior tax manager at accountancy firm, Menzies LLP explains the increased rates of NIC will raise £12bn annually, which the Government plans to use to pay for the impact of the pandemic on the NHS and also to invest in social care reform. However, the increases will add to the cost burden that SMEs are facing at a very challenging time.
In addition to the loss of income and dwindling cash reserves that many businesses suffered when they were forced to scale back operations or close their doors during the national lockdowns, some have taken out Government-backed loans that now need to be repaid. Other pandemic-related costs have included the need to create a covid-safe environment for staff and customers and provide the equipment needed for employees to work remotely. Brexit has also left some businesses struggling to secure the skills they need, introducing additional financial and administrative burdens to recruit staff from overseas. The proposed increase in NICs also has the potential to exacerbate skills shortages by reducing funds available for training. This may also encourage more individuals to work as contractors, rather than being on their company’s payroll.
To mitigate the impact of the forthcoming NIC hike on their financial position, employers must plan carefully. For example, when the new levy is introduced next April, some businesses may need to scale back plans to hire new people or cancel pay rises. Those employers that are unable to absorb the increased tax liability may even be forced to make pay cuts or only offer part-time positions so the wages fall below the threshold for NICs.
It’s also important for SMEs to reconsider their remuneration packages and look for ways to minimise the effects of the proposed cost increases, such as by making the most of exempt benefits provided under salary sacrifice schemes. This should involve seeking expert advice sooner rather than later to find out how their current employee benefits could be affected.
Businesses should also think about smart ways to get more for their money by taking full advantage of tax breaks. For example, spending £200 per head on the office Christmas party could effectively cost the employer £400 per head, once employment taxes have been considered. By taking steps to keep their spend per employee below £150, businesses could become eligible for the £150 annual exemption for social functions and events. Rather than blowing their entire budget in one go, the £250 per head cost savings could be invested in further events to motivate the workforce throughout the remainder of the year, or other essential business expenditure.
While the Government’s announcement has come at a challenging time for many UK SMEs, there are steps they can take to mitigate the impact of the proposed changes on their cash position. By planning ahead and carefully reviewing their employee remuneration packages, businesses can maintain a healthy financial position as they get back on track for growth following the pandemic.
