The impact of the NIC changes

by Adam Marlow

The impact of the NIC changes

The Chancellor of the Exchequer, Rishi Sunak, delivered his Spring Statement on Wednesday 23 March 2022.

Despite lobbying to delay the upcoming 1.25% increase in NICs (the soon to be “Health and Social Care Levy”) and dividend tax rates, the government has decided to go ahead as planned. However, as has now been widely reported, the primary threshold for employees and the lower profits limit for the self-employed will be increased from 6 July 2022, to effectively align with the income tax personal allowance. The mechanics of this are not clear cut so here is a little more detail:

  • Primary threshold – from 6 July 2022 the threshold is amended as follows:
    • Weekly – from £190 to £242
    • Monthly – from £823 to £1,048
    • Effective Annual (i.e. if the new weekly amount is multiplied by 52 weeks)– from £9,880 to £12,570
    • Actual Annual (for people subject to the company director rules) – £11,908 (3 months at £9,880 and 9 months at £12,570), before increasing to £12,570 in 2023/24.

The Lower Earnings Limit remains at £6,396 (annual), meaning employees entitlement to contributory benefits are unaffected by the primary threshold increases.

  • Lower profits limit (LPL) – as Class 4 NIC is computed on an annual basis, the LPL for 2022/23 will be computed on a pro-rata basis (3 months at £9,880 and 9 months at £12,570) to mirror the position for employees.
    • 2022/23 – £11,908
    • 2023/24 – £12,570
  • Class 2 NIC – to ensure that self-employed individuals with profits under the LPL are not required to pay any NIC, equivalent measures are being introduced for Class 2 NIC. Self-employed individuals with profits below the LPL limits set out above will not be required to pay Class 2 NIC. Those with profits between the Small Profits Threshold (SPT) (£6,725) and the LPL will be treated as having paid Class 2 NIC for the purposes of accessing entitlement to contributory benefits. Those with profits below the SPT will still be required to make voluntary Class 2 NICs if they need to maintain their contribution record.

The reason for the 6 July effective date is to give payroll software providers opportunity to implement the changes.

A new Bill has already been introduced to effect these changes – National Insurance Contributions (Increase of Thresholds) Bill – and the government has asked Parliament to expedite the parliamentary progress of it.

As will be set out in our April Monthly Tax Newsletter the change in employee NIC rate and threshold will create an overall NIC saving in 2022/23 (when compared to 2021/22) for most employees with a single job and a salary of £34,000 or less. This is computed as follows:

  • 2021/22 liability: (£34,000 – £9,568) x 12% = £2,932
  • 2022/23 liability: (£34,000 – £11,908) x 13.25% = £2,927

The equivalent ‘break-even’ point for the self-employed will be profits of approximately £28,500.

However, for many, their tax and NIC bill in 2022/23 will exceed the amounts they paid in 2021/22. Key to this is:

  • There has been no secondary threshold change for employers (but see the detail on the Employment Allowance below); this remains at £9,100 for 2022/23 and, in relation to most employees, employers will pay at the new rate of 15.05% above this.
  • For employees and the self-employed, if their earning/profits exceed £34,000 or £28,500 respectively (see below), the net effect of the rate increase and the threshold expansion is an overall increase in NIC liability.
  • Income tax allowances and thresholds have not received inflationary increases as we go into 2022/23. The personal allowance remains at £12,570 and the basic rate band remains at £37,700 on top of the personal allowance.
  • Salary inflation is running high in some sectors and industries.

Employment Allowance – for eligible employers, the employment allowance for 2022/23 will be increased from £4,000 to £5,000. There have been no changes to the eligibility criteria and the key restriction of having a previous tax year Class 1 NIC liability of less than £100,000 remains.

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