Why the National Insurance hike will cost companies more than double the headline of 1.25%
Here is why the true cost of the National Insurance increase is 3.5% for businesses
The announcement from the prime minister on the 7th of September about a hike in Employer’s National Insurance contributions will have employers fight harder to prevent losing more talent from their business, and therefore increasing costs.
From April 2022, both employers and employees will face tax rises so we asked Scott Morton, Payroll Specialist, to explain what the true cost of this increase is to businesses:
What the 1.25% NI hike really refers to
The 1.25% refers to both employers and employees and it is expected to raise about £12bn which will be used to fund the pandemic backlog*. Depending on how much an employee earns, they will have an extra 1.25% coming off of their pay each month. This is effectively extra tax and will result in a lower net income.
By taking a look at the table below, an employee on £30,000 and with net take home pay £23,112 will see it lower by £255, to a yearly net take home pay of £22,856 from April 2022.
*source: Sky News
So is it a 2.5% NI hike rather than a 1.25%?
Since the NI increase includes both employers and employees, this is in fact a 2.5% hike. Let’s take someone earning an average salary of £30,000 per annum come April. It is certainly an extra deduction of £255 for the employees, but employers will also be out of pocket by £265 in additional NI costs.
This means that a business with 30 employees and a 30,000 average salary, will have to incur an extra minimum cost of £7,950 per year from April 2022.
The actual true cost for a business is 3.5%
The actual cost does not stop at the 2.5% increase for businesses. Where employers do the sensible thing by increasing salaries to ensure employees take home at least the same amount each pay day come April, it’s not just the 1.25% employee National Insurance deficit they need to match. This is because employees suffer additional tax, National Insurance and pensions deductions on any pay increase they receive. For an employer to plug the gap for an employee earning £30,000, on top of the 1.25% hike in employer National Insurance, it is going to cost companies more like £745.
“the real cost for business owners is more like 3.5% rather than 1.25%.”
In fact, by taking a look at the table below, we can clearly see that the cost for employers will be significantly higher than 2.5% should they wish to retain their staff and keep employee satisfaction high.
What can be done to reduce the impact
There are strategical ways for business owners to reduce their National Insurance costs. For example, pretty much every employer now has a workplace pension scheme; yet around 70% of small and medium businesses are paying huge sums of National Insurance on top of their employee’s pension contributions. Businesses can look to operate a government-recognised salary sacrifice pension scheme and stop paying National Insurance on employee pension contributions, which would cover the cost of this NI hike.
For more information, get in touch with us through our chat box or book a call with one of our specialists.