Impact on your net income from the Spring Statement

National Insurance Contribution (NIC) is the hot topic of this Spring Statement.

NIC rates increase, but NIC threshold also increases.

NIC rates increase by 1.25% cross the board.

 

NIC changes

Current

From April 2022

Employee NI-

Primary threshold to upper earnings limit (from £12,570 to £50,270)

12%

13.25%

Above upper earnings limit (above £50,270)

2%

3.25%

Employer NI –

Above secondary threshold (above £12,570)

13.8%

15.05%

Self-Employed NI –

Lower profits limit to Upper profits limit (£12,570 to £50,270)

9%

10.25%

Above Upper profits limit (above £12,570)

2%

3.25%

 

There is also a catch – the NIC rate increases kick in from the next tax year in April, however, the NIC threshold will only take effect from July 2022. For the first 13 weeks of the tax year, it is higher NIC rate on the same lower threshold (£9,880).

 

 

Impact on tax-payers at various income levels

 

Only tax-payers earning up to £34,000 will benefit from this change. The higher earners will be worse off. The table below illustrates how much more NI will be deducted approximately – depending on how much employee pension is deducted at source. The assumption of 5% is used in this calculation.

 

 

Salary at

£60,000

Salary at

£90,000

Salary at

£120,000

Salary at

£150,000

Employee NI in 2021/22 £5,019 £5,589 £6,159 £6,729
Employee NI in 2022/23 £5,303 £6,229 £7,156 £8,082
Extra Employee NIC £284 £640 £996 £1,353

To mitigate the extra NIC, employees can opt in salary exchange scheme with their employers, that is to voluntarily make more contribution to pension from salary every month, this will reduce the amount of salary subject to NIC, hence reducing NIC payable. This is more beneficial than making a lump-sum pension contribution at the end of tax year, as it reduces both income tax and NIC.

 

Impact on small business owners

 

Since both employee NIC and employer NIC increase, it will cost business owners more. For sole company directors, the costs of making NIC for themselves will increase due to the NIC rate increase. For companies who hire employees, the employment allowance increases to £5,000 per annum. To make this amount more tangible, it is enough to cover 3 employees on a £20,000 salary.

 

Other points

 

VAT registration threshold will freeze.

Capital gains tax annual allowance will freeze.

Inheritance tax nil-rate band will freeze.