Managing the NI Rise from April 2022

UK government has committed to an across-the-board addition of 1.25% to NI rates from 6 April 2022. Based on the average UK wage of £31,000 per annum (Office for National Statistics), the NI rate rise will cost employees and employers a total of almost an extra £600 per year.

In practice, higher earners will be hit harder by the NI hike than the lower paid. On an annual salary of £24k, employee and employer NI bills will be 8% and 7.19% greater respectively. Whereas for someone earning £80k per year, NI increases are 15.3% and 8.66%.

To counteract some of the impact of the impending 1.25% percentage point increase in National Insurance Contributions (NICs), the income level at which individuals start paying NICs will rise from £9,880 to £12,570 in July. However there is still more you can do.

Dividends partial escape

To prevent director shareholders of companies escaping the NI rise by taking a greater part of their income as dividends (not liable to NI) in place of salary, the dividend tax rates have also been increased by 1.25%. The dividend rate rise affects director shareholders but not their companies. This means that despite government efforts there’s a saving to be made by reducing your salary (where liable to NI) and increasing dividends by a corresponding amount.

For example, swapping £10,000 of salary for £10,000 of dividends means the company avoids NI of £1,505 which far outweighs the increase in NI. It’s important to consider that while the company saves NIC when paying dividends rather than salary, the company must have sufficient distributable reserves to be able to make dividend distributions to shareholders to opt for this.

Savings for employers

While companies can pay dividends to their director shareholders instead of salary to escape part of the rise, that option isn’t open to their employees who don’t own shares in the company. The good news is that there’s an alternative which can allow many employees and their employers to mitigate the NI increase.

Salary sacrifice (HMRC calls them optional remuneration arrangements or OpRAs) can reduce NI costs for employees and employers. An OpRA involves an employee giving up some of their salary in exchange for a benefit in kind. While the scope for these was severely curtailed in 2017, there’s still room for a successful OpRA.

Limited scope for OpRAs

Anti-avoidance rules block most tax and NI advantages of OpRAs but several remain, e.g. cycle to work schemes and pension contributions. The latter is especially useful as auto-enrolment means that many employees contribute to their employer’s workplace pension scheme.

Using your firm’s workplace pension scheme, an OpRA can be tailored to reduce or in some cases eliminate the extra NI costs for employees and employers. In broad terms, it involves your employees reducing the salaries they use to pay their workplace pension contributions which you then pay instead.

Companies can reduce NI costs by paying director shareholders a dividend instead of part of their salary. For other employees, a salary sacrifice arrangement relating to workplace or personal pension plans can reduce or possibly eliminate the effect of the NI increase for both employers and employees.

Let’s Talk

For help managing the changes in NI for tax efficiency, get in touch with our team of tax specialists on let’s talk.

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