The simple answer is that it will increase the take home pay of employees but will have virtually no impact on employers' costs. This is because national insurance contributions are calculated based on an employee's salary in the current pay period.
For example, if an employee earns £1000 a month and the (hypothetically) total NI threshold is £823, then after the first £823, the remaining £177 will be subject to a deduction based on the threshold it has crossed.
Currently (for the 2022-2023) tax year, an employee pays 13.25% of anything above the primary threshold (if his or her NI letter is A - more on this later). This means £177*13.25%=£23.45 will be deducted from the employee's wages.
There is also Employer Class 1 NI due, and for employers, it is based on the Secondary Threshold, which is £758. Employer's pay 15.05% above that, so in this case the employee has earned £1000-£758= £242. This 242*15.05%=£36.42.
So, just by paying an employee £1000, your employee has had to give up £23.45 and you've had to pay £36.42 for the privilege of paying said employee. What about income tax?
Well, in this example, we are below the monthly income tax limit which is £1048 so no tax is charged (assuming the employee was on a standard tax code of 1257L).
But how is NI calculated and worked out?
For the Employee
There are several thresholds: (1) Lower earnings limit (and generally this is free from government deductions), (2) Primary Threshold (once earnings cross this number then there is generally 13.25% applied for the employee up until the end of the Primary Threshold), (3) Upper Earnings Threshold (once the employee's income is higher than this, he or she will be charged 3.25% for earnings in this segment).
For the Employer
There are also several important thresholds: (1) Lower earnings limit (generally free from NI contributions), (2) Secondary Threshold (like the Primary Threshold for employees, once income is crossed into this segment, there will be NI charged at 15.05%. What you should be aware of is that the Secondary Threshold is a lower number than the Primary Threshold, so employers start paying before employees do. (3) Upper Earnings Limit (once the income is higher than the Secondary Threshold upper limit, then deductions for the Employer continue at 15.05% whereas for the Employee deductions, it reduces to 3.25% (as explained in the prior paragraph).
What are the NI thresholds for 2022-2023?
The best source of information on the National Insurance Contributions thresholds is the government website here.
What about the changes Rishi Sunak announced at the end of March 2022?
The changes take place for salaries paid after July 5 2022. Essentially, your last month of pay under the NI thresholds set out will be your June monthly pay run (assuming employees are paid monthly).
What has been changed?
The Primary Threshold for employees has been increased to £242 per week (up from £190 per week), up to £1048 per month (up from £823 per month) and to a total of £12570 per year (up from £9880 per year). This means that NI is due at the same time income tax is due for someone on the 1257L tax code. Obviously there are individual circumstances that always come into play, but for the most part, the tax free allowance is aligned with when NI deductions start. So the marginal rate of deduction hits employees at the £12570.
For Employers, there hasn't been a change in the Secondary Threshold, so Employers will continue to pay the 15.05% on the same threshold as before, which as pointed out, is lower than the primary threshold.
Let's take an example
Before July 5 (e.g. June 2022 payroll)
- Lower earnings limit: £533 - 0%
- Primary Threshold limit: £823-£533 = £290 - 0%
- Above Primary Threshold: £1500-£823 = £677 - 13.25%
- Upper Earnings limit = £4189 (the worker doesn't earn enough to reach this)
Employee (assuming no tax) receives £1500-£89.70 = £1410.30
For the Employer NI
- Below Secondary Threshold: £758 - 0%
- In the Secondary Threshold: £1500-£758= £742 - 15.05%
- The worker doesn't exceed the Secondary Threshold Upper Limit
Hence: total Employer NI is 15.05%*£742= £111.67
Total NI is Employer NI (paid to PAYE) and Employee NI (deducted from the employee's wage and paid by the employer to PAYE)
=£111.67 + £89.70 = £201.37
After July 5 (e.g. July 2022 payroll)
Employee earns £1500 per month
- Lower earnings limit: £533 - 0%
- Primary Threshold limit: £1048-£533 = £515 - 0%
- Above Primary Threshold: £1500-£1048 = £452 - 13.25%
- Upper Earnings limit = £4189 (the worker doesn't earn enough to reach this)
Hence: total Employee NI deduction for the employee is 13.25%*£452 = £59.89
Employee is better off by £89.70-£59.89 = £29.81
Employee (assuming no tax) receives £1500-£59.89 = £1440.11
For the Employer NI
- Below Secondary Threshold: £758 - 0%
- In the Secondary Threshold: £1500-£758= £742 - 15.05%
- The worker doesn't exceed the Secondary Threshold Upper Limit
Hence: total Employer NI is 15.05%*£742= £111.67
Total NI is Employer NI (paid to PAYE) and Employee NI (deducted from the employee's wage and paid by the employer to PAYE)
=£111.67 + £59.89 = £171.56
You can see from our quick example (note income taxes have not been calculated in this example) that an employee is slightly better off but for the employer there is almost no change in the cost of paying and employing the person.
There is, however, some icing on the cake as the Employment Allowance is increased to £5000 from £4000 so some of the Employer NI will be absorbed into this additional offset.
