'Mini-Budget': National Insurance U-Turn

On Thursday 22 September, the Chancellor, Kwasi Kwarteng, announced the reversal of the increase to NIC rates from 6 November 2022. This was published on 28 September 2022.

*For the latest information please see our mini budget summary

Kwarteng stated:

“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, whilst also allowing the British public to keep more of what they earn.”

The reversal also abolishes the planned Health and Social Care Levy.

The news will come as a welcome relief to employers, who will see the rate of Class 1 Secondary NIC decrease back to 13.8% from 15.05%, and employees, who will see the rate of Class 1 Primary NIC decrease by 1.25% back to 12% and 2%.

Kwarteng has also pledged to uphold the increase to the employee National Insurance threshold (introduced in July 2022) to £12,570. Such measures saw up to 2.2m of the most affected citizens fall outside of the scope of paying National insurance.

This could mean an average saving of £330 of National insurance for up to 28 million UK individuals - a welcome relief to many households as an attempt to tackle cost-of-living pressures.

1. How is this going to work in practice?

Relief to both employees and employers will come directly via the employer’s November payroll submissions, however depending on the complexity of employers’ payroll packages, this may be fully implemented in future payroll periods.

2. What about NIC on Forms P11D and PAYE Settlement Agreements (PSA)?

Class 1A NIC (via the form P11D(b)) and Class 1B NIC (via PSA returns) is paid by employers. Given this is a change within a tax year, the Government has decided that a blended rate will be used for the 2022-23 tax year. This will be important to remember in July and October 2023. The magic blended rate is 14.53%.

3. What about Class 1A NIC on Termination Payments?

HMRC introduced Class 1A NIC on payments over £30,000 that qualified for the £30,000 tax free position. The Government has confirmed that the blended rate is not applicable on these payments.

Therefore, if a payment of say £45,000 is made as qualifying enhanced redundancy on 7 November 2023, the first £30,000 will be free of tax and NIC and the remaining £15,000 will be subject to income tax (at applicable rates) and Class 1A NIC at 13.8%. If this was paid on 31 October 2022, the Class 1A NIC would be 15.05%

4. What about annual NIC payments (for the self-employed individuals and directors)?

Again, blended is the key term here. To ensure fairness with those who pay NIC on a weekly or Monthly pay period basis, the Government have confirmed that Class 4 NIC will be blended at 9.73% and 2.73% respectively. This removes the need for any complicated apportionment.

This is also the case for Company Directors who pay NIC on an annual earnings basis – their rates will be 12.73% and 2.73%.

5. What are the Key Considerations for Employers?

  • Timing of payments, particularly bonuses and qualifying termination payments – it will be important to carefully review these aspects, particularly if you are still planning when to make payments.
  • Payroll software configuration – how quickly can changes be made to payroll software, and what impact will this have on your organisation?
  • Employee communication – employees may want guidance on the impact of these changes on their net pay
  • If you have not already done so, is now the time to look at introducing other payroll cost reductions like Pension Salary Sacrifice and Electric Car Salary Sacrifice? The implementation of such schemes could help save costs and increase employee net pay further, whilst saving your organisation money.
  • Income deferral – many employers and employees are considering what options they have to defer income given the wider recent announcements by the Chancellor

Please get in touch

We can support your business to implement the steps required to be compliant with the proposed changes. We also offer further support in relation to helping businesses manage their Income tax and NIC employer obligations, both in terms of reducing cost and supporting the business to manage their risk. For more information, please get in touch.

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