NATIONAL INSURANCE - 07.02.2022

The true cost of the 1.25% NI hike

NI increase

From 6 April 2022 the NI paid by both employers and employees is increasing by 1.25%. So, employees will pay 13.25% on earnings over £190 per week up to the upper earnings limit (£967 per week) and 3.25% above that. The NI cost to employers will increase from 13.8% to 15.05% on earnings above the secondary threshold of £175 per week.

Tip. To pre-empt any queries from staff when they get their April payslips, consider including an explanation of the increase.

The true cost

1.25% may not sound like much, but the real cost is much greater. The tables below show the true effect of the increase in NI at different salary levels for both the employee and the employer:

Employee contributions

From the table, an employee earning £80,000 a year will see their NI bill increase by 15.31%.

Employer contributions

The table shows that the picture for employers is not much better with the NI increase ranging from 6.52% for a £20,000 salary to an 8.66% NI increase for an £80,000 salary.

Saving NI

Salary sacrifice. One way to mitigate the NI hike is to offer employees the option to sacrifice part of their salary for pension contributions.

How’s it done? An employee agrees to a reduction in their contractual gross earnings by an amount equal to their employee pension contributions and, in exchange, the employer agrees to pay increased employer pension contributions instead.

When implemented correctly salary sacrifice for pensions results in both the employer and the employee paying less NI. This is because the employee gives up their right to receive salary (which would otherwise be liable to employee NI) and receives an employer contribution to a registered pension scheme instead (which is an NI-free benefit).

Example. An employer has 100 monthly paid employees who each have an annual salary of £30,000. The employer would save £17,879 in NI for the year and the employee would save £157.41 (see The next step ).

Contract change. It’s important that the employee’s contractual entitlement to earnings is given up before it is treated as received for tax and NI purposes. This means that contracts of employment must be amended to reflect this before their first reduced salary payment under the new arrangement is made.

For an NI increase calculator, visit https://www.tips-and-advice.co.uk , Download Zone, year 14, issue 05.