The National Insurance Contributions increase on contractors: how much; what it means

What’s in a tax rise? According to HM Treasury, it’s 1.25% -- because National Insurance is increasing from 12% to 13.25%.

But according to others, including Money Saving Expert’s Martin Lewis, and the contractor sector’s own Chris Bryce, the new CEO of the FCSA, it’s actually 10%. After all, both of them argue, HMT will be getting 10% more per taxpayer by adding on the small-sounding 1.25 percentage points.

What’s less divisive is that April 2022, when the rate of National Insurance you pay is going up, will soon be upon us, writes chartered accountant Helen Christopher, chief operating officer at Genie Accountancy.

The National Insurance increase: aka the HSCL

And with the new tax year comes this increase in National Insurance Contributions (NICs), the precursor to the government’s Health and Social Care Levy (HSCL). As prime minister Boris Johnson will tell you, the HSCL is designed to raise additional money for the NHS and social care in the aftermath of the Covid-19 pandemic.

While most people are agreed that the health service could do with the extra money, the increase is irking some because of how it is presented, as mentioned at the outset.

Billed widely as 1.25% points increase to all NIC rates (for employees, employers and the self-employed), the effective percentage increase is much higher, as most basic rate taxpayers will suffer an effective increase in their employee NIC of 10%, given the increase is from 12% to 13.25%.

The table below shows the effective NI rates for next tax year and the corresponding salary thresholds.

Please note, from April 2023, the 1.25% ‘levy’ will be a separate entry on payslips, highlighted as ‘HSCL,’ at which time NI will return to its lower rates.

What does higher National Insurance mean for contractors?

Given the perceived lack of support for contractors during the pandemic and the current pressures on inflation, it is perhaps not surprising that many contractors are aggrieved and concerned by what this NIC hike means for them.

Complicatedly, the impact of the NIC rise will depend on how an individual contractor is engaged. For example, those that are working on outside IR35 contracts though their limited company are likely to be less affected than those working through an umbrella company.

As to the latter, from April 2022, umbrella contractors will be facing the prospect of lower take-home pay from having to pay the increased  (10%/1.25% points) Employee NIC -- on top of umbrella companies themselves also having to pay increased employment costs from Employer NIC rising (by 10%/1.25% points).

Will your assignment rate accommodate the NICs hike?

For contractors using umbrellas, their ‘assignment rate’ will need to increase if the additional NIC costs are not to adversely affect their pay. Consider, when an umbrella agrees the assignment rate with an agency or end client, the rate will be set to cover the contractor’s agreed day rate, plus the umbrella’s costs of employment -- including the inflated Employer NIC and the umbrella’s margin. So unless assignment rates increase, the contractor will inevitably feel the effects of both increases to NI.

From the umbrella’s perspective, it must cover its costs including the increased Employer NIC from the assignment rate, but if the rate has not increased in line with costs, then the funds available to be paid to the contractor are reduced. The umbrella contractor themselves, like any other employee, will suffer the increase in Employee NI on their gross salary, thereby further reducing their take-home pay.

Dividend contractors caught too

For non-umbrella users, one of the significant advantages of being outside IR35 and operating through a limited company is the ability to structure your earnings in such a way as to minimise tax. Many contractors in this position will pay themselves a minimal salary and top up with dividends.

But recognising that drawing dividends is a popular option with outside IR35 contractors, the government has also increased dividend tax rates by 1.25% from April 2022. This means that tax on dividends will be paid at the following rates.

Ready to potentially pay another £450 in tax?

What does the higher dividend tax mean in real terms?

Well, if the contractor pays themselves a salary, paid at £8,840, which is the secondary threshold for NIC and takes dividends up to the higher rate tax threshold, no NIC is payable on the salary either by the employee (the contractor) or the employer (their limited company). The dividends will attract an additional £450 tax bill from 2022/23 onwards.

Finally, get talking…

With contractors still trying to recover from the perfect storm of off-payroll, Brexit and covid, the HSCL has the potential to be painful. There are certainly some conversations for contractors to have before the end of the tax year, both with agencies and end-clients around potential rate increases, and regarding tax planning opportunities.