National Insurance Hike: How Will It Affect Your Business?

16 February 2022

With National Insurance contributions increasing, what areas of business will the tax rise hit the most, and how can they prepare for this change?

advice : Policy, Strategy and Tax

The past two years haven’t been easy on small businesses. They’ve taken a big hit since the pandemic, with the fallout already costing small businesses £126.6bn. Financial support has been distributed, but 81% of UK SMEs say that these packages have not been enough to cope with the multitude of challenges that the pandemic has brought, coupled with Brexit supply chain issues.

The so-called ‘Pingdemic’, slashed funding, forced closures, lost earnings, and staff shortages have already hindered the speed of the UK economy’s recovery post-pandemic. Now, with the upcoming National Insurance increase recently confirmed by the Treasury, business owners are wondering how the tax rise will affect them in real-world terms.

What do the National Insurance contribution rises mean?

Coming into effect this April, the UK Government has confirmed a rise of 1.25 percentage points on National Insurance contributions for employees, employers, and sole traders. The increase is to help pay for health and social care, despite a pledge that job taxes would not rise in the government’s manifesto. It’s a contentious move, one that has been heavily criticised in the UK business community for its arguably heavier strain on people with lower incomes and small business owners.

Looking at the tax increase as 1.25% does not show the full picture of how much it will actually cost businesses owners. The actual figure is an increase of 1.25 percentage points, which amounts to 1.25% plus 9%. This is will cost businesses a lot more than they’re contributing now, with the new rates estimating to set employers back around £6.5bn.

How will this affect SMEs?

For mid-sized businesses, the increase is frustrating, but not detrimental. However, for start-ups that are already stretched thin, the 1.25% figure could have much more of an impact.

To put it into a yearly estimate, one staff member on the national living wage based outside of London currently costs SME owners £2,359.80 a year in national insurance. However, with the increase, the figure rises to £2,654.68 a year. That means business owners will be paying an additional £241.87 a year for each member of staff. Depending on how many employees you have, the figures become substantial very quickly.

What areas of businesses will this hit the most?

The increase comes at a difficult time for employers. With record-level of job adverts on LinkedIn and Indeed, businesses are looking to hire new staff and invest in growth plans. Unfortunately, some may be forced to rethink their plans to hire new employees or when making pay rises. Ultimately, the tax hike will make hiring new staff more expensive. Employers pay a percentage of Class 1 National Insurance for each employee, depending on how much they get paid. So, with employees already a big investment cost, recruitment is likely to take a big hit.

The extra money going into National Insurance contributions may also impact training and benefits. With some businesses forced to make cuts in these areas, they may become less attractive to talented workers.

How can small business owners prepare?

Acting early will help you be prepared for April 6th and will minimise the impact of the transition period.

1. Get to know your finances

Primarily, make sure you have a strong understanding of your financial position. It’s important to immediately begin planning (especially cash flow forecasts) to understand how the increase is going to affect your finances. You might want to apply the breaks to other areas of expenditure / investment, or you might decide to invest more to accelerate growth.

2. Accounting

If you’re short on money, investing in an accounting software is a low-budget way of getting your own analysis of the figures. If you have a budget that can accommodate it, speak to a chartered accountant to get the run down. Investing in expert advice will help relieve the administrative burden and confusion while being able to offer recommendations to help support your business.

3. Prepare your employees

Employees will be paying more for national insurance contributions too, so this will be reflected in their payslips. It’s important to be as transparent as possible when communicating the changes to your employees. Ensure that they understand how they will be affected in advance to prevent surprises down the line and help with staff financial wellbeing.

What does this mean for the UK economy?

SMEs generate 50% of GDP, account for 60% of the employment and around half of turnover in the UK private sector. Needless to say, the economic recovery is relying heavily on small businesses to bounce back. The good news is that the economy is continuing to grow, and small business owners are in a much better financial situation to handle the new rates than they were this time last year.

In times of change, preparation and planning is key. Business owners should have a solid grasp on what’s coming into and out of the business and not having this knowledge in place could be damaging to the business’ future. At Finerva, we try to make life as simple as possible for you. Get in touch for a confidential chat about how we can help you and your business in the wake of this change.

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.