Despite UK business owners currently facing a whole host of pandemic-related challenges, the Prime Minister threw another spanner in the works with the announcement that National Insurance rates are set to rise from April 2022.

 

National Insurance, which is used to pay for the NHS, benefits and the state pension, is a tax on earnings paid by both employees and employers, as well as on profits for self-employed workers. The 1.25 per cent increase will be mainly used to clear the NHS backlog, which has mounted during the Covid-19 pandemic.

 

It has been said that the tax will return to its current rate in 2023, but how will it affect you in the meantime?

 

What does it mean for… small businesses?

 

It’s been a tough 18 months for small businesses, with schemes like furlough only doing so much. So, it’s understandable that many immediately began to worry when this latest tax change was announced.

 

And with reports estimating that the new rates will cost employers a combined total of around £6.5 billion, tension has continued to rise.

 

Unfortunately, the biggest hit of the tax increase is likely to be on small business finances, by making employing staff more expensive.

 

To put it into context, one staff member on the living wage will currently cost £2,359.80 in National Insurance, on the Class 1 rate of 12 per cent for those employed on a salary of £9,568 to £50,270. However, after April 2022, this will increase to £2,564,68 a year. While it may not sound like much, for small businesses where money can already be tight, after calculating the amount for multiple employees, the figure will quickly add up.

 

In turn, this is likely to cause headaches when it comes to recruitment or lead to business owners needing to make cuts and savings elsewhere to make up the extra cost.

 

Self-employed workers?

 

Self-employed workers will also feel a negative impact of the National Insurance rise.

 

Currently, workers pay either Class 2 or Class 4, which is taxed on income after business expenses. So, if you’re a sole trader, under new rules you’ll lose an additional 1.25 pence for every £1 earned – and given you pay your own salary, this is a direct reduction of income.

 

Freelancers?

 

Similarly to self-employed workers and sole traders, freelancers will also suffer from loss of income due to being taxed more on their profits.

 

In fact, IPSE – a not-for-profit organisation which works to support freelancers and the self-employed – warned that the increase is making it “almost impossible” to work as a freelancer, after it follows the recent IR35 reforms and the pandemic, during which support for freelancers was deemed insufficient by many.

 

How can I prepare?

 

The saving grace for employers and workers is that these changes aren’t due to come into effect until April 2022, giving six months to prepare.

 

To ensure you’re ready, one of the first things to do is speak to your accountant to get a rundown of the costs your business is likely to incur, to make sure you can afford new payrolls.

 

Secondly, if money is likely to be tight, take a look at any growth plans you have in place and evaluate whether these will still be possible after the rise. Remember, it’s better to delay for a month or two while you get back on your feet than rush and potentially hit problems further down the line.

 

The good news for business owners and self-employed workers is that the country is in a much better position than it was this time last year – the economy has continued to grow over recent months, restrictions have eased and we’re on our way back to some form of normality – so hopefully, with plans in place, SMEs, self-employed workers and freelancers can make it through relatively unscathed.

 

Got some more questions? Get in touch with our team on info@chuhanandsingh.co.uk or call 01642 244090 for advice and support.