National Insurance tax hike: How it affects you

Today, the government set out plans to raise National Insurance by around 10% (or 125 basis points) for workers, the self-employed and employers. In this blog, we’ll explain what that means and how the increase will affect you.

What is National Insurance?

National Insurance is a UK tax on earnings and self-employed profits, used by the government to fund a number of state benefits.

A few of the ways National Insurance is used include:

• the State pension
• statutory sick pay
• unemployed benefits

National Insurance is paid by employers, employees and the self-employed. However, once you reach State pension age, you no longer have to pay.

Why is National Insurance increasing?

The government have said they want to use the estimated £12bn generated by the increase to ease pressure on the NHS.

They also plan to invest in social care, helping the elderly and vulnerable afford outside support for things like washing, eating and medication.

This National Insurance increase will only run for the 2022/23 tax year. After that, National Insurance will return to its previous rates, with the difference being made up with a new tax named the Health and Social Care levy.

This new Health and Social caretax will be set at 1.25% of annual income (calculated the same way as National Insurance) and will also be owed by anyone receiving a State pension - starting in April 2023.

How much more will I pay?

How much you pay in National Insurance depends on your income and whether you work for an employer or yourself. Let’s look at a breakdown of the new National Insurance rates.

If you’re employed

If you work for a company or pay yourself a salary from your limited company, you’ll need to pay Class 1 National Insurance. This is taken from your gross, pre-tax salary.

The amount you pay depends on your income and is changing from 6th July 2022. Here are the current employer National insurance rates, starting April 5th 2022.

National Insurance Rates (5th April to 6th July 2022)

Under the new rules, if you earn £30,000 you’ll now be paying £666.48 between 5th April and 6th July.

However, from 6th July 2022, the amount you earn which is free from National Insurance is also increasing. This means you won't pay any National Insurance on any earnings below £12,570 - up from the previous threshold of £9,880.

This is important, as it means anyone earning up to £34,000 will now be paying less National Insurance than the year before.

National Insurance Rates (6th July 2022 onwards)

If you’re self-employed

If you’re self-employed, you’ll owe Class 2 or Class 4 National Insurance, payable via your tax return.

• Class 2 if your profits are £6,515 or more a year
• Class 4 if your profits are higher than £9,569 a year

Class 2 rates are £3.05 a week, while Class 4 is now 9% on profits between £9,569 and £50,270 and 9% on profits over £50,270.

This won’t be changing as part of the new rates. However, tax on dividends is also increasing by 1.25%, meaning in the future, you’ll owe more tax on any profits you take from your business.

You don’t need to pay National Insurance when you reach State pension age, currently 66.

How much will National Insurance go up?

The government has announced that National Insurance rates go up by 1.25% across the board - starting in the next tax year, April 2022.

Effectively, this is a 10.4% increase in the amount you'll need to pay.

For those in employment, this means you’ll now need to pay 13.25% on earnings up to £4,189 a month and 3.25% on any earnings above that. You still won’t owe any National Insurance on the first £823 of your monthly income - rising to £1,048 in July.

There had been some concern about how these new rates will have a bigger impact on those with a lower income - as a greater proportion of their wages fall into the 13.25% rate.

Under the new rules, someone earning £30,000 would owe £2,706 over the year - £255 more than before. To combat this, the government has also announced it will raise the amount of our earnings that are free from National Insurance.

Now, many of the country's lowest earners will pay less in National Insurance, while high earners will have to contribute more than before. Here's how the increase impacts different people.

How this affects employers

As an employer, you need to collect National Insurance from your eligible employees' monthly wage.

It's probably worth making sure your workers are aware of this tax increase in time for April to avoid any confusion when they check their payslips.

Of course, you also need to pay employer's 1A and 1B National Insurance contributions. From April 2022, National Insurance for employers is increasing by 1.25% to 15.05% on most employees' earnings and benefits above £758 a month.

Here's the breakdown:

And here's an example. For an eligible employee earning £50,000 a year with a £500 health care benefit, employer National Insurance contributions previously totalled £5,748.53 for the year.

From April, you'll need to pay £6,266.23 - £517.70 extra annually.

Previous rate:

• £5,679.53 on eligible earnings
• £69.00 on benefits

New rate:

• £6193.98 on eligible earnings
• £75.25 on benefits

How to reduce your National Insurance

If you’re concerned about the new rates, one of the best ways to reduce the impact of National Insurance hikes is through salary sacrifice.

With a salary sacrifice pension you ‘sacrifice’ a small part of your earnings as a contribution into your pension. Your employer will need to opt-in to a salary sacrifice scheme first - you can ask your HR or Finance team if you're able to take part.

By contributing more to your workplace pension, you lower your pre-tax salary and reduce the amount of money you’ll need to pay National Insurance on.

Essentially, you get to keep more of your hard-earned money.

Here’s a quick example. If you earn £50,000, you’d normally pay £413.25 every month as National Insurance. However, if you instead added £200 into your workplace pension via salary sacrifice - you’d only owe £386.83. Over the course of a year, you’ve just saved yourself £317.

Employee National Insurance savings with salary sacrifice

And that's based on the minimum contribution - the more you add to your pension pot, the less you'll pay in tax (up to your yearly allowance).

Here's how those savings look for employers.

Employer National Insurance savings with salary sacrifice

That's £331 per employee, so the bigger your business the more you can save - and don't forget pension contributions can be offset against corporation tax.

If you’d like to find out more about National Insurance, check out our blog on salary sacrifice or request more information to discover how your company can help trim your National Insurance contributions with a Penfold workplace pension.