What the National Insurance threshold increase means for contractors

Rather than respond to demands to scrap the National Insurance Contributions increase, the chancellor confirmed yesterday that the 1.25 percentage points increase from April 2022, foreshadowing the new Health and Social Care Levy, will go ahead.

More unexpected was Rishi Sunak announcing that the threshold at which NICs become payable will be increasing to £12,570 from July 2022, thereby reducing the impact a little for those affected.

But no matter how a worker earns their income, these NI changes will affect their take-home pay, writes Helen Christopher, chief operating officer at Genie Accountancy.

Umbrella company employees

For umbrella contractors, the increase in employee and employer NIC rates means a double-whammy. To explain, like all employees, umbrella contractors will see their Class 1 NIC deductions increase by 1.25% percentage points and their employer, the umbrella company, will see the same increase in their employer NIC bill.

Unless an umbrella employee’s assignment rate increases, the contractor will inevitably feel the effects of both increases.

Limited company directors

For limited company contractors, the NIC increases may be limited depending on the level of salary drawn from the company. For a salary below £12,570, no Class 1 NIC  will be payable, so the increase of 1.25 percentage points will not be felt either by the director or the company. Where the director may be affected, however, is on Class1 A NIC paid on any benefits-in-kind they receive. The rate for tax year 2022/23 rises to 15.05%.

Owners of personal service companies should also remember that while dividends do not attract NICs payments, the rates of dividend tax were tabled to increase for 2022/23 by the same 1.25% points.

The self-employed

Underlining the broad coverage of the NICs increase, the self-employed are also not exempt from NICs going up by 1.25% points from April, and then next year falling back down again to their current level only to be replaced by the 1.25% Health & Social Care Levy.

For sole traders, consider -- Class 2 National Insurance has traditionally been payable on profits over the small profits threshold. This rate will increase from April 2022 to £3.15 per week from £3.05. However from July 2022, Class 2 is not payable on profits up to the lower profits threshold of £12,570, so lower earning self-employed people will retain more of what they earn.

In addition, Class 4 NIC is payable on business profits. For the first quarter of the new tax year, Class 4 will be paid on profits over £9,880, but this will increase to £12,570 from July 2022. Any profits between the lower limit and the upper limit of £50,270 will attract NIC at an 3.25% rather than 2%.

Pro-active? Your accountant should be, so you can be

So whether you’re self-employed, contracting through a PAYE umbrella company or contracting via your own limited company, you can hopefully see why us accountants will be proactively contacting the many who will be affected by the chancellor’s unsurprising and surprising National Insurance offerings, effective from April and July respectively.

Thursday 24th Mar 2022
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Written by Helen Christopher

Chartered accountant Helen Christopher is a former head of finance & accounting and a former chief operating officer, who has worked for 28 years in corporate roles. Helen qualified as an accountant in 1995 with Price Waterhouse (now PwC) – the year she became a member of the ICAEW, and seven years prior to her becoming an FCA. Also a local magistrate for the Department of Justice, Helen specialises in tax, accounting and HMRC advice for small companies and their owners. 
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