2022/23 is set to be a year like no other in the usually predictable, some may even say mundane, world of National Insurance Contributions (NICs). Not only will NICs be the temporary custodian of the “saver of social care” by increasing its rates by 1.25%, but in an unprecedented move some of the NIC goal posts have been shifted part way into the year.
We look at what the mid-year change to the NIC thresholds means in practice for employers and what actions should be taken to ensure you avoid any compliance issues during this “unique” year before NIC returns to its familiar settled existence in 2023/24.
Flexing some bigger muscles
You are all no doubt well aware by now, whether informed by an article such as this or simply because you have taken home less pay since April, that the NIC rates have increased across all classes of NIC.
Although billed as a 1.25% increase, this is the percentage point increase rather than a reflection of the true increase in percentage growth terms.
The increase has been categorised as a temporary rise for one year only and from April 2023, NIC rates will return to the 2021/22 rates.
However, from April 2023 we will see the introduction of the stand alone and separate “social care levy” at the same cost as the temporary increase to NIC for 22/23.
For 2022/23 NIC will be hitting businesses, employees and the self-employed harder than it ever has done before.
Hungry for more attention
Following the announcement of the Health and Social Care levy and the temporary use of NICs to facilitate collection during 22/23, NIC was having its moment in the spotlight with article after article published (by people like me) about the 1.25% increase, hours of TV news time, public opinion polls and more, all centered on the increase in NIC
So how could NIC maintain public interest after being center stage? It had to be something headline grabbing and never before seen… fulfilment of policy commitments from successive government to align NIC with Tax!
All eyes remained firmly focused on NIC!
Partial alignment only
Despite it being the headline policy in what are difficult economic times, the alignment of NIC to tax was not the all encompassing reform so many governments have looked at, only to quickly conclude that it is far too complex to achieve.
Instead, the alignment referred to various thresholds (of which there are many) which determine when NIC is payable. In short, the government raised the starting income/earnings at which NIC is due to align it with the income tax personal allowance.
For some low paid workers this represented a noticeable increase in their take home pay as many paid no tax (due to the personal allowance) but did pay NIC which has always had a much lower “personal allowance”.
NIC was once again in the spotlight but this time NIC was being seen as more of a hero than a villain.
Like all good movies, there was one final twist in the story that was unexpected and potentially problematic for businesses.
A simple solution to a potentially complex situation
For employees and employers NIC is charged on a per pay period basis and does not accumulate throughout the year to give a “annual liability” in the same way that tax does.
In what was an unprecedented move, the new NIC thresholds were to be applied from 6 July 2022 (HMRC have said that it was the minimum period that payroll software providers needed to facilitate a change). A mid-year change to rates, thresholds or tax (and NIC) rate bands is virtually unheard of as well as head scratching news. However, because of the pay period basis, the change should not prove too much of a challenge.
However, not all NIC thresholds were actually raised to be in line with the income tax allowance. The threshold at which an employer has to start paying the secondary Class 1 NICs remains unchanged at £9,100 (annualised amount), which is nearly £3,500 lower than the threshold at which employees will have to start paying. It appears the government wants to “simplify and align” NIC for individual taxpayers but not necessarily for companies.
Company directors and the self-employed are treated differently to employees and do pay NIC on an annual basis, so it would be reasonable to expect that any changes to align with tax would be applicable from the start of the tax year….not so! What does a mid-year change in thresholds mean for the self-employed and Company Directors?
HMRC are not known for designing simple solutions even for simple problems – quite the opposite in fact, so many feared how the issue of mid-year change would be handled. But credit where credit is due, there was a simple solution to this problem and HMRC have taken it.
For those that have to pay NIC based on annualised amounts, then for 2022/23 modified thresholds will be used. A company director’s threshold will be £11,908, which is 3/12 of the old threshold and 9/12th of the new “tax aligned“ one.
Payroll compliance
Most employers will be relying heavily on their payroll software provider to update their payroll so all these different thresholds and rates of NIC are correctly programmed and cause no disruption to service. Indeed, as mentioned earlier allowing payroll providers time to make the necessary software changes was the reason given for changing the thresholds mid-year rather than at the start of the tax year.
If you don’t use a payroll provider, perhaps running the payroll manually or are running payroll on an older system it is critical to familiarize yourself with the changes and ensure that additional checks are done on payroll outputs from July until the end of the year as in a year where NIC is playing the problem child, errors can easily be made.
In addition, it is worth mentioning the threshold “alignment” only applies in England and not in Scotland, Wales and Northern Ireland. Employers with cross border (inter-UK) employees may end up calculating the NIC for their employees in 3, 4 or 5 different ways.
One would hope that we do not have another year where NIC takes such a prominent role in the annual compliance headache most companies face. Only time will tell if 2022/23 is the start of more changes to the NIC system, which was previously almost sidelined, and whether or not it can maintain its position at least near the front, if not, center stage.
