The recent government decision to increase national insurance contributions (known as NIC) by 1.25% from April 2022 has come at a difficult time for SMEs, many of which are struggling with the effects and problems. operations derived from the pandemic. However, employers can help mitigate costs as they move on the road to recovery by taking a smart approach to spending and considering compensation packages for employees.
What changes have been made?
Last week, the Prime Minister confirmed that starting in April 2022, there will be a temporary 1.25% increase in class 1 (salaried) and class 4 (self-employed) NICs paid by workers, as well as an increase in 1.25% in class. 1 Paid secondary NIC, paid by employers. This increases the current NIC rate from 12% to 13.25% for employees and 10.25% for the self-employed who earn above the primary threshold for class 1 and the lower limit for benefits for class 4 ( currently £ 9,568 in 2021/22) respectively. Employers will also have to pay the additional 1.25 per cent for employees who earn above the secondary threshold for class 1 (£ 8,840 in 2021/22). The temporary increase in National Insurance will be replaced by a Permanent Tax in 2023. Dividend tax rates are also increasing by the same amount to discourage switching to a dividend strategy.
These NIC rate increases will raise £ 12bn a year, which the government plans to use to pay for the impact of the pandemic on the NHS and invest in social care reform. However, the increases will add to the cost burden that SMEs face at a very difficult time. Many companies have dwindling cash reserves due to lost revenue as a result of the pandemic. In addition to having to close their doors during national closures and reduce operations due to limited staffing, many employers have obtained government-backed loans, which are now repayable. There are also additional costs related to the pandemic that business owners should consider, such as: funds used to create safe Covid work environments and provide necessary equipment for those who had to work remotely. The costs related to the pandemic are not the only factor that has meant that companies have struggled over the last year, some have had problems securing workers with the appropriate skills due to Brexit, which has generated additional administrative and financial burdens when hire staff from abroad.
The proposed increase in NIC also has the potential to exacerbate skills shortages by reducing funds available for training. This can also encourage more people to work off the payroll, rather than being employees.
Employers must plan carefully to limit the impact of the next NIC increase on their financial position. To prepare for the introduction of the new tax next April, some companies may need to consider canceling salary increases or reducing plans to hire new staff. Some employers may be forced to offer only part-time positions or make salary cuts if they cannot absorb the increased tax liability, so that they can ensure that salaries are below the IAS threshold.
It is also important for SMEs to reconsider their compensation packages and look for ways to minimize the effects of proposed cost increases, for example by making the most of exempt benefits. This should involve seeking expert advice sooner rather than later to find out how current employee benefits might be affected.
Businesses can also get more for their money by taking full advantage of tax breaks. For example, the office Christmas party can cost £ 350 per head once payroll taxes have been accounted for. Keeping your spend per employee below £ 150 including VAT and meeting the conditions, this event should be tax exempt. Rather than spending your entire budget in one go, the cost savings of £ 200 per head could be invested in additional events to help motivate the workforce for the rest of the year or drive business results.
Although the government announcement has not come at best for many UK SMEs, there are some simple steps employers can take to mitigate the impact of the proposed changes to the IAS on their cash position. Planning and taking the time to carefully review employee compensation packages means companies can begin to move toward their growth plans while maintaining a healthy financial position.