How to manage NI and Employment Allowance changes

Headline figures are misleading, so careful calculations are required.

A series of measures intended to benefit businesses, employees and the wider economy were announced during the 2022 Spring Statement last week.

These include:

• National Insurance threshold will increase from £9,568 to £12,570 in July 2022. This means that employees will keep more of their salary before they have to start paying national insurance contributions (NICs).

• Employment Allowance (EA), a tax relief scheme which entitles eligible businesses, organisations and charities to pay reduced annual national insurance liabilities will increase from £4,000 allowance to £5,000. From the 2023/2024 tax year, these employers will also be entitled to a reduced rate of their Health and Social Care Levy liabilities. 

But national insurance itself has also gone up by 1.25 per centage points to help fund the NHS and Social Care Levy. Industry commentators say this increase could mean that increased employment allowance and NIC threshold are therefore likely to be of limited financial benefit.

So what does all this mean for clients in practical terms and how effective are these measures? We asked several accountants to find out.

£1,000 increase in employment allowance is misleading – actual savings are much less

Clare Bowen, director, MHA Monahans

While it might appear to be a good thing that HMRC is providing businesses a further £1000 of employment allowance, it isn’t as straight forward as an extra £1000 in business owners’ pockets.

The increase in National Insurance by 1.25% will take back some of this increase into HMRC coffers to be spent on the NHS and Social Care. HMRC will also win in other ways: for businesses who are claiming the whole amount, it will result in an additional £1000 of taxable profit, as additional costs are offset by the added allowance.

For example

• Imagine your Employers National Insurance is currently £5000. £4000 is covered by EA, leaving a £1000 payable expense in profit and loss and a reduction of corporation tax for this expense of £190.00. Net payment to HMRC will be £810.00.
• The next tax year, due to the increase in NI rates, your employers NI will be approximately £5450. £5000 is covered by EA, leaving a £450 payable expense and a reduction in Corporation Tax due to the expense of only £85.50. Net payable to HMRC £364.50.
• Savings overall will be £445.50, much less than the £1000 quoted in headlines.

We also need to consider smaller businesses who don’t currently utilise all the allowance. They are still hit by the increase in the NI levels but receive no direct financial help.

Next steps: EA needs to be re-claimed each year, so employers must select the option on payroll software, confirming they meet HMRC criteria. This can be tricky for business owners to understand so professional advice may be needed.

Verdict: Headline figures of HMRC providing a further £1,000 in employment allowance is misleading. Employers also need to be aware that employment allowance needs to be re-claimed each year via payroll software.

Evaluate client’s sources of de minimis state aid prior to making employment allowance claim

Tom Walker, partner, Wellers

The employment allowance increase is unlikely to cover the 1.25 percent increase in employer national insurance costs from the 6^th April 2022. That being said, it’s still a welcome surprise.

To claim the allowance, employers need to submit an Employer Payment Summary (EPS). The Employer Allowance is classed as ‘de minimis state aid’ and so counts towards the state aid thresholds that are assessed over a rolling three-year period. Before making a claim, employers will need to check that they will not exceed de minimis state aid thresholds for their sector.

Next steps:

• Check whether clients (and other companies within the same corporate group) have a combined Class 1 NIC liability of less than £100,000.
• Evaluate the client’s sources of de minimis state aid to ensure that thresholds are not exceeded.
• Finally, accountants need to make sure clients have made formal claims for the Employment Allowance via an EPS.

Verdict: Evaluate the client’s sources of de minimis state aid prior to an Employment Allowance claim to ensure their sector thresholds are not exceeded.

Any employment allowance benefit may be lost if client’s NICs exceeds £80,000

Nicola Goldsmith, head of private client, Haines Watts London

Anything that reduces the burden on employers is welcomed. The employment allowance is worth an extra £1,000 a year. Smaller employers in particular will enjoy a greater benefit.

On its own, an increase of £1,000 in the rate is unlikely to encourage employers to employ more staff, but the full allowance of £5,000 may help with some staffing decisions. 

In addition, national insurance employer’s contributions are increasing from 13.8 per cent to 15.05 per cent at the same time.

This means that for every £1,000 of salary subject to employer’s NIC paid, an additional £12.50 of NIC is payable.  Once the payroll subject to employer’s NIC exceeds £80,000, the allowance will not benefit them.  This can restrict growth, so this may impact hiring behaviour.

Next steps: Accountants need to advise clients where the benefit of additional allowance may be lost, particularly if the client’s NIC exceeds £80,000.

Verdict: Any benefit from employment allowance may be lost if the client’s NIC exceeds £80,000.

Ensure clients have the right processes in place to continue making correct payroll deductions

Lauren Harvey, assistant accounts manager, The Accountancy Partnership
The increased Employment Allowance is good news for employers who employ two or more people, helping them to reduce their costs, even with the additional Health and Social Care Levy. It does, however, mean a larger gap in the optimum salaries for sole directors who can’t take advantage of the increased EA, unlike two or more directors who can. 

Meanwhile, the Government’s decision to increase NIC threshold not only allows people to keep more of what they earn but also simplifies the system for taxpayers as opposed to having two different thresholds for employees.

Next steps: Communication is key. Accountants should be notifying clients as soon as possible, and ensure they have processes in place to continue making the correct payroll deductions without delays or errors which will need dealing with later on.

Verdict: Ensure there are processes in place to make accurate payroll deductions associated with Employment Allowance and NICs.

Annie Makoff is a freelance journalist and editor.