Background
The 1.25% increase in Class 1 National Insurance contributions (NICs) to help fund the NHS and Social Care is due to come into force from 6 April 2022. As part of his Spring Statement Chancellor Rishi Sunak attempted to soften this increase by announcing a significant uplift in the National Insurance Threshold. The increase brought the threshold at which employees will start to make NICs in line with the income tax threshold of £12,570 from 6 July 2022.
However, it should be noted that the starting threshold for employer National Insurance Contributions has not increased accordingly and will remain at the previously announced level of £9,100 for the 2022/23 tax year. Given many owner managed businesses often pay only pay a minimum salary to director shareholders we thought it would be useful to highlight the potential impact of these National Insurance changes.
Detail
The Primary Threshold for National Insurance (NI), the point at which employees start paying NI, will increase from £9,880 pa to £12,570 from 6 July 2022 in line with the income tax threshold.
The Secondary Threshold, the point at which employers start to make NICs on an employee’s salary, will remain unchanged at £9,100. This therefore increases the discrepancy between salary levels that apply for employees NICs and for employers NICs.
It is common in many owner managed companies for the owners to pay themselves a minimum salary, equal to the Primary Threshold, to ensure that they incur no tax or national insurance deductions. Whilst the business suffers a small employers NI cost, the advantage of receiving earnings at this low level is that it ensures the employee still earns NI credits towards their state pension.
As a result of the employers threshold remaining unchanged the however the choice of salary level going forward is not straightforward and therefore it will be important for each individual to consider the most beneficial salary based on their own personal circumstances.
This is further complicated by the increase in the Employment Allowance (referred to in last week’s Muras Matters) as businesses with a minimum of two employees may find that any increase in employers NIC is offset by the increase in the Employment Allowance to £5,000.
If you have any questions regarding the upcoming changes to National Insurance , or would like assistance in determining the most beneficial salary level to your business, please contact our Tax Director, Jenny Marks.
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