In 2021’s autumn budget, the chancellor, Rishi Sunak, confirmed the government’s planned increases to National Insurance Contributions, which are due to come into effect from 06 April 2022.

The decision comes as part of a bid to bring additional funding to the health and social care sector, with funds raised by the levy being legally ring-fenced to help clear NHS backlogs and address the ongoing social care crisis.

But what do the changes mean for employees and employers?

What are National Insurance Contributions?

National Insurance Contributions (or NICs) are a tax on earnings for employees, self-employed and employers (based on the earnings of their employees). These contributions earn you the right to receive certain state benefits, including retirement pensions.

Whether you are employed or self-employed will influence the type of contribution you pay, and exact contributions will vary depending on your income levels. NICs are not charged for those with low earnings, or on any pension or investment income (such as dividends).

What’s changing for NICs from April 2022?

For one year – 06 April 2022 – 05 April 2023 – the changes will see NICs increase by 1.25%. At the end of the 2022/23 tax year, NICs will revert back to 2021/22 levels, and the health and social care levy will become a separate, new tax, at 1.25%.

The initial increase will not affect those already above state pension age. However, if you’re an employee or self-employed below state pension age – with income or profits above £9,568 – or an employer, you will pay the increased contributions at the start of the new tax year.

The separate 1.25% levy, coming into effect from 06 April 2023 will affect all employees – including those over state pension age – that earn above the primary threshold. For those who are self-employed, the new levy will apply – even if profits are below the Lower Profits Limit.

The changes – including the introduction of the new levy in April 2023 – will not affect existing NIC reliefs, which will still apply for:

• Employees under 21
• Apprentices under 25
• Qualifying Freeport employees
• Those eligible for Employment Allowance
• Armed forces veterans.

What about dividend income?

The government will also be increasing all rates of dividend tax by 1.25% in line with the NICs changes. The change will be UK-wide; however it will not affect the current £2,000 dividend allowance, or any dividends received by ISAs.

How does the change affect employers?

If you currently pay NICs that are:

• Class 1
• Class 1A
• Class 1B

You will need to start paying the 1.25% increase in contributions from the start of the new tax year. You will also need to pay the separate levy from 06 April 2023 for all employees below state pension age, and, depending on earnings of employees over state pension age, at this stage, you may also have to pay the new levy for these employees’ earnings.

All existing employer contributions will still apply when the increases come into effect.

How will your take-home pay be affected?

If you’re wondering how your take-home pay will be affected from 06 April 2022, you can use our income tax calculator – so you can see and budget for the amount of tax you’ll be paying under the new rates.

To read more about the government’s plans to support health and social care, and to understand how the National Insurance rate increases sit within this, click here.

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