National Insurance changes: how are employers affected?

In light of the government’s decision to scrap recent increases to NICs from November, People Management asks what it means for businesses

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The government has announced it will reverse the recent rise to National Insurance Contributions (NICs) and has scrapped plans for the Health and Social Care Levy. 

It was revealed yesterday (22 September) that the 1.25 per cent increase to NICs that came into force in April will now be reversed from 6 November, and the new, separate Health and Social Care Levy of 1.25 per cent that was to be introduced in April 2023 would also be cancelled. 

The increase to NICs had originally been introduced to help fund the growing health and social care bill, with the money from the increase being required by law to go directly to health and social care across the whole of the United Kingdom. 

The rate was expected to return to levels seen in 2021-22 from April 2023 when the Health and Social Care Levy was set to come into effect, however both increases have now been called off. 

In light of the decision, People Management explores how this change will affect employers.

Why has the decision been reversed?

Former prime minister Boris Johnson announced on 7 September that from April 2022 there would be a UK-wide 1.25 per cent health and social care levy added on to both employer and employee NICs. But, many businesses voiced their concerns about the plans and experts pushed HR to consider methods to lessen the impact on the lowest-earning employees. 

Yesterday’s announcement, however, suggests that current prime minister Liz Truss will deliver on her pledge to slash taxes to help drive growth, as The Treasury claims that scrapping the rise will reduce tax for 920,000 businesses by nearly £10,000 on average next year, with some 20,000 organisations set to be exempt from paying NI entirely due to employment allowance. 

Nearly 28 million people in the UK will benefit from the cut, retaining an additional £330 in income per year, the Treasury said.  

Chancellor Kwasi Kwarteng added: “Taxing our way to prosperity has never worked. To raise living standards for all, we need to be unapologetic about growing our economy. 

“Cutting tax is crucial to this – and whether businesses reinvest freed-up cash into new machinery, lower prices on shop floors or increased staff wages, the reversal of the levy will help them grow, while also allowing the British public to keep more of what they earn.” 

A positive move for employers and employees?

Employers, employees, and self-employed people all contribute to NI. And, even while the lowest-paid do not pay National Insurance, in a cost of living crisis “anything that puts money into the pockets of employees will be welcome,” says Gemma Dale, lecturer at Liverpool John Moores University and co-founder of The Work Consultancy. 

“Organisations are also affected by the cost of living crisis and energy costs in particular, as we can expect they will welcome this cut as it will, in effect, make it less expensive to employ people and therefore reduce the costs to do business,” she adds. 

Rachel Meadows, head of pensions and savings at Broadstone, agrees that employers will benefit from the reversal, but noted businesses will need to be diligent. “The change will mean that employers offering salary exchange or salary sacrifice for pension contributions will need to make communication and agreement wording changes for the second time in six months – a piece of administration that it will be important not to overlook,” she said. 

In addition, Neil Carberry, CEO of the Recruitment and Employment Confederation (REC), praised the decision to put a business at the centre of bringing prosperity to the UK, saying it would have pleased employers across the nation. “Reducing the counter-productive rise in employer National Insurance – a tax on creating jobs and paying people more, that falls heavily on the sectors most affected by the pandemic – is wise,” he adds 

However, Karl Handscomb, senior economist at the Resolution Foundation, has expressed views that the decision to reverse NIC increases may not be the right one. “While raising National Insurance was a flawed way to fund social care provision that would initially primarily benefit non-National Insurance payers, cutting NICs is an equally flawed way to tackle Britain's cost-of-living crisis that is hitting lower-income households the hardest," he said.

“This policy will give away most to those who need the least support. The poorest tenth of households will gain just £11.50 this year, while the top 10 per cent on average gain 60 times that amount. Twice as much of the permanent gains will go to the richest 5 per cent of households as the entire bottom half of the income distribution.”

How should employers prepare for the change?

Kate Palmer, HR advice and consultancy director at Peninsula said that now the government has declared the change, employers must make sure they are ready for this.

“Currently, the 1.25 per cent increase has to be listed separately on payslips. Payroll teams will need to be informed to remove this from 6 November, and employees should be notified that their payslips will look different.

“There will also be a difference in their final take-home wages following the removal of this. Have conversations now, so that everyone is aware before the change happens, make any changes to current practice, including providing training to payroll teams if needed,” she added.