National Insurance Contributions rise and the impact on termination payments and umbrella companies
Written By
Senior Associate
UK
I am a corporate tax lawyer and a senior associate in the Bird & Bird international Corporate Group, with experience in corporate, employment and finance taxation and employee incentive arrangements.
The much-discussed increase in National Insurance Contributions (“NICs”) comes into effect on 6 April 2022. As well as the squeeze this puts on employees’ earnings, it will add cost to termination payments over £30,000 for employers and will have significant consequences for the large contingent workforce now engaged by umbrella companies following the changes to IR35 in 2021.
NICs are a tax paid by employees and the self-employed on their earnings or profits, and by employers on the earnings of those they employ.
From 6 April 2022, the rate of NICs will increase by 1.25%. The threshold on which the main rates of employee and self-employed NICs will increase to £9,880, but the higher-rate threshold will remain at £50,270.
You can find the current rates and the rates from 6 April 2022 here >
From April 2023, the NIC rates will return to their current rates. The additional 1.25% will be ring-fenced as a separate legislated charge, labelled as a new Health and Social Care Levy. This levy will appear as a separate line item on payslips, similar to the PAYE tax and NIC entries. This levy will be payable by all working adults, including those above state pension age who are exempt from NIC.
Settlement Agreements
Employers’ class 1A NICs are due on the amount of termination awards paid to employees which are over £30,000.
As a result, where an employer is to enter into a settlement agreement and make an ex-gratia payment above the £30,000 tax-free threshold, there will be an additional cost if that payment is made on or after 6 April 2022. Employers should take this into account when planning / structuring exit packages. Where possible it will be best to make termination payments on or before 5 April 2022 so that they are subject to the lower current employee class 1A NICs rate.
Umbrella Company Contractors
The increase in NICs rate will have a double effect on umbrella company workers. This is because, unless an umbrella company worker’s day rate is increased proportionately, the worker will have to bear the increased NICs cost for both employers’ and employees’ NICs.
In an umbrella company relationship, the umbrella is the employer and therefore is liable to pay employment taxes. The umbrella company therefore charges an assignment rate to its end-client which factors in employment costs, including employers’ NICs, and the umbrella company margin.
From the total fees which the umbrella company receives for the worker’s services, it deducts costs including employers’ NICs, and after that deduction pays the worker their specific pay rate. The worker then pays income tax and employee’s NICs on that specific pay rate. This results in an effective double NICs deduction for the umbrella company worker.
Consequently, unless umbrella companies are able to pass on the additional NIC cost to their end-clients, umbrella workers will have to absorb a 2.5% NIC increase, rather than the 1.25% increase faced by PAYE employees and limited company contractors who pay themselves primarily via dividends (though it should be noted that the dividend rate will be increased by 1.25% as well).
By way of example, an umbrella company employee earning £50,000 per year currently pays £4,851.84 in employees’ NICs and £5,680.08 in employers’ NICs. This will increase to £6,194.58 (employers’ NICs), and £5,357.24 (employees’ NICs).
Therefore, from April 2022, the worker will pay an extra £505.40 in employees’ NICs, and £514.50 in additional employers’ NICs.
