If you are an employer running a payroll for your employees make sure that you pay income tax and National Insurance on their behalf. Make sure that you are well aware of the changes in the NI rates that are due this year to avoid any costly mistakes.
What is national insurance ?
National insurance is a tax that is paid on the earnings and the profits. It is paid by the employer, employee and the self-employed.
How does it work?
The national insurance is paid into a fund which is then used to pay the statutory benefits this includes the maternity pay as well as the statutory sick pay.
If you had been paying national insurance contributions you are entitled to the state pension and additional unemployment benefits as well.
Once you reach the state pension age you won’t have to pay any national insurance and this will reduce the overall taxes that you pay.
How do you pay national insurance?
Each person is assigned a unique national insurance number. It is the number which you use throughout your life. And this number will determine how much tax you have throughout your life.
If you are an employee , your national insurance will be deducted at source. This means that you will get your pay from your employer after deducting your income taxes and national insurance.
If you are an employer you should collect income tax and NI contributions before paying them wages as part of your payroll obligation.
How much you pay
How much national insurance you pay will depend on your income. The lower earnings limit is £533 per month and the primary threshold is £823 per month from 6 July 2022 to April 2023 it will increase to £1048 per month. This means that you will only make NI contributions if you are earning above this threshold.
The rates are changing for employees from 12% to 13.25% for income between primary threshold and upper earnings limit and from 2% to 3.25% for income above the upper earnings limit.
The rates for employers are changing from 13.8% to 15.05% for NIC classes 1,1A and 1B
How will it affect you if you are an employer ?
If you are an employer this will increase your overall employee costs as you will be paying increased NI contributions to HMRC.
Make sure you are ready for the change
Make sure you are well aware of your financial situation. You might want to hire an accountant to know exactly how costly it will be when the changes are incorporated. You can also get an accounting software to do your own analysis of the costs by preparing cash flow forecasts etc.
What can be done to mitigate the impact of the change
Many companies might have to introduce or re-examine the salary sacrifice scheme. Salary sacrifice scheme means that there is a cut in the salary and the money is added into your pension instead. This will reduce the salary and therefore the taxes paid including the national insurance.
Some companies might have to consider cutting down salaries or even reducing the number of employees .
If your cash flow forecasts are negative after the changes are introduced you should consider cutting down your expenses elsewhere.
You might work on ways to increase your sales, consider spreading your business by investing in more projects. To see the overall effect on the costs you can hire an accountant,
You can also consider automating your business. For example, if you are an accountant you can use more accounting softwares, as they are more efficient time wise.
If you are an employer running payrolls and you want an accountant to do the payroll services for you contact Taxaccolega at 020 8127 0728 and our team of accountants will be happy to help you.