Despite a manifesto promise and massive controversy, the government is going ahead and raising National Insurance in April. The increase itself is only for a year. After that National Insurance will return to normal and a new Health and Social Care Levy will be introduced. Here is a quick guide to what you need to know.
NI vs the H&SC levy
National insurance is paid on earnings. In an interesting quirk of the UK’s tax system, National Insurance liability is calculated per job. Income tax, by contrast, is cumulative.
Under current rates, people earning less than £6,515 do not pay NI. People earning £6,515-£9,568 pay £3.05 per week. People earning £9,568-£50,270, 9% + £3.05 per week. Once a person’s earnings go over £50,270, they pay 2% + £3.05 per week. From April, anybody earning £9,568 or more will pay an extra 1.25% NI.
Assuming the government sticks to its current plans, the Health and Social Care Levy will be set at the same rates but will have a broader application. Firstly, it will be paid by people of state pension age if they are still working. At present, standard NI contributions are not although it seems more than possible that this will change in future.
The Health and Social Care Levy will also be applied to dividend payments to shareholders, and to employers’ NI contributions. What this means in practice will depend on each person’s situation.
Employees have very little, if any, room to manoeuvre on tax. If, however, you can afford to sacrifice a bit more of your income in the present, you could consider increasing your pension contributions. These are deducted before Income Tax and National Insurance. Increasing them would therefore lower your NI liability.
For sole traders
Sole traders are essentially in the same position as regular employees. One key difference, however, is that sole traders may not be able, let alone willing to make regular, fixed contributions into a pension scheme.
It might therefore make sense to use a Lifetime ISA (assuming you are in a qualifying age group). Contributions to Lifetime ISAs are made post-Income Tax/NI. You do, however, get the government bonus which helps to counterbalance this. You’re not losing out on an employer’s contributions since you don’t get them anyway.
You might also want to look at the option of setting up a limited company. This could give you more control over how and when you took money out of the company.
For limited companies
If you have employees then you will need to deal with the costs of the employer’s contribution. This may be unwelcome news but all of your (UK-based) competitors will be in the same situation. If you are not in a position to absorb all of the costs then you may need to look at increasing prices and/or reducing (or eliminating) dividends for shareholders.
You may also wish to reassess your use of labour in the light of these changes. For example, if you were planning on hiring new employees, would it make more sense to hire freelancers? Would it be possible for you to use technology instead of human labour or at least to reduce your reliance on human labour?
If you are reliant on dividends for income, then you will just have to accept the changes. If, however, you can live on a lower income, at least for a while, you might wish to consider seeing if you can receive further stock instead of a cash dividend.
Try to look for ways to generate extra, passive income. Even if this is subject to the Health and Social Care Levy, the fact that the income is passive may make the increased tax easier to bear.