National Insurances changes will hurt employers more than their employees
Chris Lee at accountants James Cowper explains what April’s changes to National Insurance will mean for employers and employees.
When the Labour government announced increases to National Insurance it was denounced by the then opposition parties as a ‘tax on jobs’. Despite this, rate increases are still planned and come into effect from 1 April 2011. The changes will be a heavy burden for many employers. However, there is some relief for less highly paid workers.
At present, male employees aged between 16 and 65 (60 for women) pay NI on earnings above £110 per week. Earnings of up to £844 per week are charged at 11%, with earnings above that charged at 1%. For employers, the same £110 weekly limit applies, with NI above payable at 12.8% irrespective of the age of the employee.
From April 2011 the weekly threshold will increase to £139 and the £844 upper limit will reduce to £817. On earnings between £139 and £817 the NI rate for employees will increase by 1% to 12% and on earnings above £817 it will increase to 2%. For employers, the rate will also increase by1% to 13.8% on weekly earnings in excess of £136.
A 1% increase will also apply to the class 4 NI contributions paid by the self employed. On annual earnings of between £7,225 and £42,475, the rate from April 2011 will be 9%, and on earnings over £42,475 it will increase to 2%.
The increase in the earnings threshold will mean that some lower paid workers will stop paying NI altogether and many others will pay less. The tipping point for employees is an annual salary of approximately £24,000. At that level the NI changes will be neutral, above that employees will see an increase. However, the effect on take home pay will be obscured by income tax changes also planned for April 2011, with an increase of £1,000 in the tax free personal allowance benefiting the lower paid.
For an employee earning £50,000 a year, the annual NI increase will be a relatively modest £121. Employer’s NI will however increase by £256, so it is employers who will bear the main brunt of the increase.
Businesses may look to the Chancellor to announce some relief in next month’s Budget, but the prospects do not seem good for NI reductions in the short to medium term. NI exemptions are already in place for some new businesses in disadvantaged areas, but this is of little consolation to hard pressed employers in the supposedly prosperous South East.
Employers may feel there is little they can do to mitigate the effect of the NI increases, and they may well be correct in many cases. However, it is well worth examining employees’ remuneration packages to see if NI and tax savings can be achieved. For example, employees with young children may well be willing to exchange cash salary for childcare vouchers - up to £55 per week can be paid in this way entirely tax free. And if employees are paying personal pension contributions, it can be relatively straightforward to convert these into employer contributions and achieve a NI saving.
Chris Lee is a tax partner at James Cowper accountants and business advisers. He can be reached by email: clee@jamescowper.co.uk. Visit www.jamescowper.co.uk for more information.