New chancellor Kwasi Kwarteng is reversing the recent increase to national insurance (NI) rates, taking effect from 6 November 2022. This will see millions of employees take home more pay each month. This is how employers can prepare for these changes to national insurance.
What’s Changing?
In April 2022 a 1.25% increase in national insurance contributions (NIC) came into effect. This was originally proposed to help fund the growing health and social care bill. The rate was expected to drop back in April 2023, when the Health and Social Care Levy was planned to come into effect. However in his first budget, being named the mini budget, Mt Kwateng announced that he would bring this decrease forward, taking effect in November 2022 instead, and that the plans for the Health and Social Care Levy are now called off. Nearly 28 million people in the UK will benefit from the cut, receiving an additional £330 in income per year, according to the Treasury.
How to Prepare for Changes to National Insurance
At present, the 1.25% increase is listed separately on payslips. Payroll teams will need to remove this from 6 November, and employees should be notified of this difference to their payslips. Have conversations now, so that everyone is aware before the change happens. As with any changes to current practice, providing training and refresher courses to payroll teams can be hugely beneficial.
How to Account for National Insurance Contributions
The most important area when it comes to paying national insurance contributions is to ensure that your employees’ NI categories are up to date. The NI category determines how much NI the employee and employer need to contribute to each payroll. Take the opportunity to ensure that your employees’ categories are up to date.
NI Categories
A – Employees that are aged 21 to state pension age, and aren’t in B, C, H, J, M, V, X and Z or working in a Freeport.
B – Married women and widows entitled to pay reduced National Insurance. (This stopped in 1977, but if the employee opted in before this and has not stopped this at any point, they may still be able to pay the lower rate).
C – Employees over the State Pension Age.
H – Apprentices under 25.
J – Employees who can defer National Insurance because they’re already paying it in another job.
M – Employees under 21.
V – Employees who are working in their first job since leaving the armed forces (veterans).
X – Employees who do not have to pay NI, for example they’re under 16.
Z – Employees under 21 who can defer National Insurance because they’re already paying it in another job.
Freeport Categories
These apply to employees who work at a Freeport.
F – All employees working in a Freeport, apart from those in I, L or S.
I – Married women and widows who work in a Freeport and are entitled to pay reduced NI. (This stopped in 1977, but if the employee opted in before this they may still be able to pay the lower rate).
L – Employees who work in a Freeport and can defer National Insurance because they’re already paying it in another job.
S – Employees who work in a Freeport and are over the State Pension age.
Understanding National Insurance Categories
It can be difficult to correct the mistake at a later date, if an incorrect NI category is selected. This could result in paying a penalty for a mistake if you did not take ‘reasonable care’. Here is how to ensure you choose the correct National Insurance category every time.
Employee Age
The NI letter category is based on the employee’s information on the pay date. When you hire a new employee, ask to see a form of identification that confirms their date of birth and record this in your files. You need to know your employee’s age so you can select the correct national insurance category. Anyone who wants to defer their NI must apply to do so with HMRC. They will need to show you a deferment letter from HMRC confirming this. Each time you run the payroll, make sure that nothing has altered meaning that an employee needs to have their NI category changed. Examples where you may need to change the NI category include, reaching state pension age (SPA), turning 16 or 21, or becoming an apprentice.
Employees From EU, Lichtenstein, Norway, or Switzerland
Employees from social security institutions in the EU, Iceland, Lichtenstein, Norway, or Switzerland may have a Portable Document A1 (PDA1) form that exempts them from paying NI in the UK, during the period covered by the PDA1 form. If this is the case, record when the PDA1 form expires and ensure that either a new one is received, or you will need to amend the corresponding national insurance category.
Employees From Outside EU, Lichtenstein, Norway, or Switzerland
An employee from a nation outside of the EU, Iceland, Liechtenstein, Norway, and Switzerland where the UK has a social security agreement, may have a reciprocal agreement, a Double Contribution Conventions, or a certificate issued by another country which states they are subject to that country’s social security legislation, then the certificate would be accepted as proof that the employee does not need to pay NI for the period covered by that certificate. Once again record when the certificate expires and ensure that either a new one is received, or you will need to amend the corresponding national insurance category.
If you have employees arriving in the UK to work from any other nation, the employer and these employees could be exempt from paying UK NI contributions for the first 52 weeks of their employment under these circumstances:
- Employee is not ordinarily resident in the UK
- Employee normally works outside the UK for a foreign employer
- Here to work in the UK for a finite period by a foreign employer
- They continue to work for that employer when in the UK
Prestige Business Management Works for You
At Prestige Business Management we can help you prepare for and enact changes that affect your business. Find out what we can do for you. Call us today on 0203 773 2927.
