After a period of doubt over whether or not this increase will actually be introduced - and concerns that this tax rise will cause people to experience further hardship as it coincides with a period of rising inflation and increasing energy bills – the Government has now confirmed it will be proceeding as originally announced and employers and employees should prepare for it.

Background

The Government announced their plans to increase the rate of NICs on 7 September 2021, a few weeks prior to the Autumn Budget. Under the proposals, a number of NIC rates will be increased by 1.25% for the 2022/23 tax year, before they are returned to existing levels and a new, separate tax known as the Health and Social Care Levy (‘the levy’) is introduced.

The funds raised – estimated at over £11bn a year - are to be ring-fenced and spent on the NHS and related health and social care bodies over the next three years. As NIC is not a devolved tax, the changes will apply across England, Wales, Scotland and Northern Ireland.

Impact for 2022/23

For 2022/23, the following main rates of National Insurance which apply to employees and employers will all be increased by 1.25%. At the same time, the various thresholds at which the different rates apply will also be uplifted in the usual manner.

Class	Current rate (2021/22)	Increased rate (2022/23)
Class 1 (employees) – main rate	12%	13.25%
Class 1 (employees) – earnings over £967/week	2%	3.25%
Class 1 (employers)	13.8%	15.05%
Class 1A and 1B	13.8%	15.05%

 

Although the rates themselves are being increased by 1.25%, a number of commentators have highlighted that this actually means a (roughly) 10% increase in the size of an employee’s annual NIC bill. This is because, once over the primary threshold, the employee currently pays 12p in the pound, but will in future pay 13.25p in the pound – which is around 10.4% more. In practice,  the increased bill won't always be 10% because individuals have to earn over a certain threshold before NIC is applied – and because there is a different rate which applies to earnings over £50,270 - but in many cases assuming a 10% increase in the actual employees's NIC costs should apply as a rough rule of thumb.

In cash terms, for an employee on £20,000, their annual NIC bill will rise by £89.90, while an employee on £50,000 will see an increase of £464.06. From the employer’s perspective, the increase will mean an extra £100 in employer’s Class 1 NIC for an employee on £20,000, and an extra £475.37 for an employee on £50,000.

HMRC is asking employers to add the following, optional, text to payslips to help to explain to employees the change in their tax bills - ‘1.25% uplift in NICs, funds NHS, health & social care’.

Heath and Social Care Levy

As noted above, the temporary rise in NIC is actually the precursor to the introduction of a new tax, or levy, specifically designed to raise funds for the NHS and related bodies – the Health and Social Care Levy.

On 6 April 2023 we are expecting NIC rates to be put back down by 1.25%, and the new levy introduced at 1.25%. The levy will apply to amounts of income which are chargeable to:

• Class 1 which is paid by employees and employers
• Class 1A and 1B which is paid by employers on certain benefits

The levy will in some respects follow similar rules to existing NIC – for example, the NIC reliefs which apply to employees under 21, apprentices under 25, armed forces veterans and the employment allowance will apply to the levy too.

However, the new levy has one significant difference – unlike NIC, it will also be charged on those over the state pension age. Normally employees stop paying employees class 1 shortly after reaching state pension age and while that is unchanged, the levy will be applied to all employees, regardless of age. (Employer’s NIC is not affected by the employee reaching state pension age.)

At the end of January, HMRC published some interim guidance on the increase and the levy.

The self-employed and owner-managed businesses

For completeness, we should note that this rise is not just confined to employees and employers. The self-employed will also be affected as Class 4 rates will be increased on 6 April 2022 from 9% to 10.25%. Equally the rate of dividend tax, which may be relevant to some owner-managed companies where the director takes some or all of their remuneration as dividends as well as investors, will also be increased by 1.25%.