From April 2022, businesses will face an increase in their National Insurance contributions (NICs), alongside an increase in dividend tax rates, as part of the new Health and Social Care Levy.

This will see a 1.25 percentage point increase in NICs across several different classes. The increase in NICs will initially affect everyone over the age of 16, but below state pension age, earning more than £184 per week through employment (Class 1 NICs) or the self-employed with profits of £9,568 or more (Class 4 NICs).

The 1.25 percentage point increase also applies separately to employer NICs (Class 1A and 1B).

From 2023, the Health and Social Care Levy will also apply to individuals working above State Pension age as well. Currently, this group are not required to pay any NICs.

The increase will be effectively introduced from April 2022, but from 2023 it will “be formally separated out” under new legislation known as the Health and Social Care Levy.

How will the increase in the National Insurance rate affect employer National Insurance contributions?

Employers and employees currently pay Class 1 National Insurance, which is based on how much each employee earns.

For employers, they pay this at a rate of 13.8 per cent. Under the changes, this will now increase by 1.25 percentage points. Employers are estimated to pay an additional £6.5 billion as a result of the new rate from April next year.

As an example, if a full-time staff member is paid the current National Living Wage an employer’s National Insurance contributions will be £2,359.80 per year.

However, from April this will increase to £2,601.67 a year – an increase of almost £250 a year.

Multiply this over all of the employees paying National Insurance contributions in a business and the amount of additional cost soon adds up.

Directors pay

As well as increasing the rate of National Insurance, the Government will also increase the dividend tax rate by 1.25 percentage points from April next year, as part of its plans to fund care.

Many directors are paid via a combination of dividends and a regular salary, as this is often the most tax-efficient method of remuneration for higher earners.

However, following this change, directors and other employees in receipt of dividends will need to review whether this chance could affect their annual income.

Ready to help

We appreciate that many employers will have questions about the hike in National Insurance contributions and dividend tax next year.

We are standing by and ready to offer advice so that you have a clearer idea of how this change will affect you and your employment costs. To find out more about our payroll services, please contact our experienced team.