National Insurance increase

With the new tax year comes the government’s Health and Social Care Levy (HSCL).

Image source: https://www.bbc.com/news/uk-politics-58436009

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 would agree that the health service could do with the extra funding, the increase has its critics because of how it has been presented.

Please note, from April 2023, The ‘levy’ will be a shown separate entry on payslips, as ‘HSCL,’ at which time NI will return back to its 2021/22 rate.

 What will the National Insurance hike mean for contractors?

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

To further complicate matters, 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 through their limited company are likely to be less affected than those working through an umbrella company. As to the umbrella contractors will be facing the prospect of lower take-home pay from having to pay the increased Employee NIC -- on top of umbrella companies themselves also having to pay increased employment costs from Employer NIC rising (by 10%/1.25% points).

Assignment rate

For contractors, their ‘assignment rate’ will need to increase if the additional NIC costs are not to adversely affect their pay. Consider, when an umbrella agrees on 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 employment costs, including the inflated Employer NIC and the umbrella’s margin. So, unless assignment rates increase, the contractor will feel the effects of both increases to NIC.

From the umbrella companies’ 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 available funds 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, further reducing their take-home pay.

Dividend

Non-umbrella users have the advantages of being outside IR35 and operating through a limited company with the ability to structure their earnings in such a way as to minimise tax. Contractors in this position will pay themselves a minimal salary and top up with dividends.

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.

What does the higher dividend tax mean in real terms?

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.

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**Disclaimer: With information excerpt and data extracted from: https://www.contractoruk.com | Article source: The National Insurance Contributions increase on contractors: how much; what it means