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What the National Insurance hike means for your business


The tax hike could hurt small businesses as much as working people (Picture: Getty Images/iStockphoto)

The recent announcement that National Insurance rates would be hiked by 1.25% to fund social care has been widely discussed as an issue for working people.

But many small business owners will face a double or triple whammy when it comes to paying the tax.

Not only will they be paying more NI themselves if employed, or more dividend tax if they pay themselves through dividends, but their businesses will also face a higher rate of NI on every employee, in what tax expert Scott Gallacher, from accountants Rowley Turton, calls ‘a tax on jobs’.

Mike Cherry, national chair of the Federation for Small Businesses (FSB) says the move to hike taxes is an ‘anti-jobs, anti-small business, anti-start up manifesto breach’.

‘These hikes will have business owners and sole traders feeling demoralised at the point when they’re trying to recover from the most difficult 18 months of their professional lives.

‘Business owners who have done all they can to retain and support their staff during the pandemic are now being punished,’ he says.

How NI works for businesses

National Insurance is a tax paid on earned income, supposedly ring-fenced to pay for public services.

While many of us are only accustomed to seeing NI as a tax paid by individuals, the cost is borne by businesses, too.

Businesses pay what are known as secondary NI contributions for any earnings from employees of more than £737 a month. At present, this tax is set at 13.8%, but this is due to rise by 1.25 percentage points, to 15.05% of employees’ pay packets.

According to the FSB, small businesses will shoulder a £5.7billion bill for the increase each year, with small business with five employees on salaries of £31,000 paying an annual NI bill of £16,500.

Jobs may be hit

Cherry, at the FSB, says it could result in 50,000 people being made redundant from small businesses alone.

‘The rise acts as a brake on employment, another reason in the “no” column for employers considering expansion, and another reason in the “yes” column if they’re thinking about cutting staff numbers. The real-world impact will be huge,’ he says.

Business owners across the UK are also alarmed.

‘My wage bill is already extremely challenging to meet,’ says Lauren Hutchinson who runs environmental store Earth Friendly Rocker and sustainable café Potion at Afflecks, in Manchester.

‘I have five staff who I pay National Insurance for. I received no meaningful support during this pandemic other than a Bounce Back Loan, which I’m now having to pay back. This rise is yet another blow to small businesses.’

‘This is just another kick in the teeth to the millions of people across the country who are already struggling,’ added Kieran Boyle, Managing Director of CKB Recruitment.



Case study: ‘The hike hits us three times over’

Stephanie and Gareth Buckley run licensed insolvency practice The Insolvency Company SW, in Somerset.

The tax hikes will mean that the business pays more for staff, as well as for their own NI contributions and for their dividend payments.

‘We are impacted three times over, as employees, employers and shareholders,’ she says. ‘Small businesses just cannot afford the Bounce Back Loan repayments, as well as furlough top-ups and now increased NI payments in what has been a very difficult trading period for many.

‘As small business owners we don’t know how profitable the year will be for us and therefore keep our salaries deliberately lower to ensure the stability of the business so that we offer secure employment for our staff — who are like family to us.

‘We would like to see small business owners supported because they are the independent businesses, the ones who create choice and change in the marketplace.’

Strategies to help

While the NI rise, which comes into force in April 2022, and will be separately badged as a Health and Social Care Levy in April 2023, is now inevitable, there are still things that employers can do to bring down their wage costs.

Praveen Gupta, national head of tax at accountancy firm Azets, says that small and medium-sized businesses need to focus on legal tax measures that reduce the bill.

‘The per cent hike represents a significant tax increase and will have a meaningful impact on SMEs as they continue to rebuild from the pandemic and pivot their businesses in the post-Covid world,’ he says.

‘For SMEs, there is now even more of a need to focus on NI strategies, such as salary sacrifice measures that could provide businesses and individuals with tax savings.’

Salary sacrifice allows employees to ‘sacrifice’ a certain amount of their salary before tax and National Insurance is paid, in return for certain benefits such as pensions, bicycles, season ticket loans and electric cars.

Employees that are currently a member of the childcare voucher schemes (now closed to new entrants) can also use salary sacrifice to pay for their childcare.

These arrangements save both employers and employees NI contributions, as well as saving income tax for the employee.

Some employers may also be eligible for Employment Allowance, which discounts the first £4,000 of NI bills for smaller employers. Not all smaller employers are eligible for this, and businesses can check whether they are eligible and find out how to claim at gov.uk/claim-employment-allowance.

Businesses can also pay reduced rates of NI for apprentices under 25, and no NI for employees under 21. Although those over state pension age do not pay NI (although they will pay the Health and Social Care Levy from 2023), employer’s NI contributions are still necessary.

Small limited companies where the director pays itself through a mixture of dividends and salary can also reduce NI bills by paying a limited salary (on which NI is payable) and a larger dividend bill. It is important to keep the salary at a threshold where you are still building up qualifying years for your state pension, however.

Even though the government is also increasing the tax on dividends by 1.25%, the tax on dividends is still lower than on income, so it is worth pursuing this approach as long as you talk to an accountant first.



Case study: ‘This costs us £2,500 pounds a year’

Sharon Birch, director of nursery Footprints Learning for Life in Hartlepool, says that the tax rise will make her business very unsustainable.

‘I’ve got 30-plus employees. This is going to have a knock-on effect to my business of about £2,500 across the year for both my contributions and their contributions.

‘We don’t make that much profit, especially at the minute because we were really hit in the pandemic, and we’ve come out of it with a Covid loan. Now taxes will arrive, the minimum wage is going to rise and pension contributions will probably rise. And then this as well.’

Sharon, whose nursery is in a low-income area and rated Outstanding by Ofsted, says she is concerned she is now going to have to put up prices for parents or work with lower staff to child ratios.

‘I didn’t get paid for three months in the pandemic. We’re an Outstanding nursery and we win awards. But it’s more like a social enterprise than a profit-making business because there just aren’t any profits.

‘We’re just being hit time and time again… I do appreciate we need more money in the health sector. We absolutely do. But I think this isn’t necessarily the right way to go about getting it.’

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