The planned April 2022 National Insurance 1.25% hike will be painful for almost everyone in employment. But, not for the first time, umbrella company workers are in line for more pain than most.
What is the April 2022 NI tax hike?
The proposed tax hike will fund both improvements to social care, and also provide a boost for the NHS. In all, during 2022/3, the Treasury expects to yield £12bn from this measure alone.
All Class 1 and Class 4 National Insurance tax rates will be increased by 1.25 percentage points.
- Class 1 Employers’ NICs will increase from 13.8% to 15.05% on earnings over £8,840.
- Class 1 Employees’ NICs above the £9,568 threshold will increase from 12% to 13.25% (main rate), and from 2% to 3.25% (higher rate).
- Class 4 contributions (for the self-employed) above the £9,568 threshold will increase from 9% to 10.25% (main rate), and from 2% to 3.25% (higher rate).
Although the case for much-needed extra funding for social care is very strong, the Prime Minister has been criticised for the way the proposed measures are targeted – disproportionately hitting lower earners.
Limited company owners cannot escape the tax rise
So, how will the NIC rate changes affect limited company owner-employees?
Unlike a traditional employee, who will have to pay higher Employees’ NICs, limited company owners not only have to pay additional employees’ NICs on their own + staff salaries but also the equivalent employers’ NICs too.
Of course, many limited company owners elect to pay themselves modest salaries – which are often free from NICs altogether, but the Prime Minister made sure that dividends too will be hit by an equivalent 1.25% rise.
In fact, a limited company owner, earning a low salary (£8,840), and drawing down dividends up to the higher rate threshold will face an additional £446.25 in additional dividend tax.
Umbrella company contractors the worst hit
Already paying a higher proportion of tax than any other contracting business model, umbrella company workers will be the worst hit from April 2022 should the NI hike proposals go through as currently planned.
If you work via an umbrella, unless your day rate is increased proportionately, you will have to bear the entire increased NI costs for both employers’ and employees’ NICs.
You can find out why you also pay employers’ NICs as an umbrella company contractor here.
So, umbrella contractors will have to absorb a 2.5 percentage point NIC hike, rather than the 1.25 point hike faced by PAYE employees and limited company contractors who pay themselves primarily via dividends.
There is no way of escaping this new tax burden, as – unlike limited company owners – you have no option to split your salary and dividends in a certain way, nor any tax planning ability (such as delaying paying dividends until a future tax year should you have reserves available).
How much more NICs will I have to pay next year?
If you are an umbrella company employee earning £50,000 per year, you currently pay £4,851.84 in employees’ NICs, and you will also have to pay £5,680.08 in employers’ NICs.
This will increase to £6,194.58 (employers’ NICs), and £5,357.24 (employees’ NICs).
Therefore, from April 2022, you will pay an extra £505.40 in employees’ NICs, and £514.50 in additional employers’ NICs.
How to work out how much more NI you will have to pay
1. Employees’ NICs
- Employees pay 12% on income between £9,568 and £52,270, and 2% above £52.270.
- From April 2023, the two percentages will rise to 13.25% and 3.25% respectively.
2. Employers’ NICs
- Employers pay 13.8% on salaries paid to employees above £8,840.
- From April 2023, this percentage will rise to 15.95%.
When will the new tax rates take effect?
The NIC and dividend tax hikes are due to take effect from April 2023.
It is worth noting that the National Insurance hike hasn’t become law yet. It may still be watered down, or withdrawn altogether. Some changes may even be made in time for the October 27th Budget.