National insurance has its ups and downs - it can feel hard to stay on top of the current rates and cause concern when the rates go up.
Every time national insurance changes, it has an effect on how much employees cost you and what your business' bottom line will be.
We’ve gathered together the main things you need to know about National Insurance and the steps you can be taking as a small business to prepare for any national insurance rises that may occur.
What is National Insurance?
The National Insurance (NI) tax was introduced in 1911 as a way to provide a fund for people who had lost their jobs or needed medical treatment. Today, the money raised by NI is used to pay for the NHS, benefits, and state pensions.
If you’re an employer or employee, the NI is based on earnings and you’ll both contribute to it. This is automatically deducted from employee waged via the pay as you earn (PAYE) tax code and sent directly to HMRC.
If you’re self-employed, the NI is taken based on your profits and you’ll usually pay your NI during your annual self-assessment tax return.
There are several different National Insurance class types and which one you’ll be in will be affected by your employment type. Employers and employees pay the Class 1 NI rates while the self-employed are usually Class 2 or Class 4 depending on their profit levels.
To find out the 2023/2024 tax year's national insurance rates, check the UK Government website.
What can small businesses do to prepare for a rise in national insurance?
National Insurance rates are ever changing and it can be hard to know how much money you need to set aside for employees. If you're facing a National Insurance hike and are worried about how to handle the increased costs of having staff, here's a few ways to prepare
Analyze the budget
The first step should be to take a look at your budget and understand how the changes will affect your company's bottom line. Will you be able to handle the higher NI contributions comfortably or will you need to make some changes? Consider speaking to an accountant to get a strong understanding of what your finances will look like when the NI hike takes place. Getting to grips with your books and your budget will help you prepare and decide what next steps to take in order to reduce your business costs.
Prepare your staff
Employees might not be aware of the changes that are coming and the fact that their contributions will be on the rise as well. It may be worth notifying any staff of the changes so that they understand why their payslips may look a little different after any NI changes and so they can update their personal budgets.
Communicate with customers
There's a chance that if the new NI contributions are squeezing your profit margins that you'll have to raise prices. While this is usually a last resort option, if it's one you're opting for, be sure to give customers plenty of notice as well. These changes will be felt by everyone in the working world, so giving any customers time to adjust their finances is important as well. If approached correctly, you should be able to adjust the cost of your products or services without too much fanfare. Read our guide on how to communicate price chances to customers.
Review your pension set-up
There are two main ways that pension contributions are approached:
- Relief at source method: contributions are deducted from the employee's net salary, after income tax has already been deducted.
- Net pay method: the full amount of the pension contribution is taken from your pay before tax is deducted. Often this is done through a salary sacrifice scheme and can help save some national insurance tax.
A salary sacrifice scheme allows you to give up some of your salary in return for a pension contribution from your employer. This helps because you’re paying taxes on a reduced income amount even though you’re getting the same amount paid into your pension pot. Both employer and employee can save a bit of money from this. If you decide to offer a salary sacrifice model, you should inform employees about any affects this may have on their benefits given that their salary is technically lowered by this type of contribution.
If you're looking to take on your first employee, consider an apprentice
If you don't have employees yet but were hoping to take someone on in the future, consider training an apprentice instead. If you have the time to train someone while they work for you, apprenticeships can be a great way to get your first employee. In exchange for spending 20% of their employed time being trained, their wages tend to be slightly lower and, for apprentices under 25, you may not need to make National Insurance contributions.
You're contributing to the economy by training someone in a new skillset and, should the apprentice master all the skills you're teaching them, you'll be able to take on a higher workload. If you decide to keep them on as a full employee once the apprenticeship ends, you can feel certain that you'll have a solid employee that has all the skills you’re looking for.
Look for other ways to reduce costs
Whether it’s cutting down on your energy costs or claiming all of your allowable expenses, you can look to cut costs in other parts of the business to prepare for a rise in National Insurance costs. A few things you can look out for are:
- Sector specific tax incentives: Certain sectors have specific tax relief schemes that may help if you are eligible for them. Just a few to look out for are the creative industries tax relief, research and development tax relief, retail discount, or small business rate relief. These are just the national schemes, but there may be local schemes as well, so be sure to check with your local authority as well.
- Green energy tax cuts: As the UK works towards their Net Zero goals, more and more incentives are appearing for businesses that are working towards greener business practices. The types of financial support are very varied, but the UK Government Green Business Funding and Zero Carbon Business Grants List are a great first port of call for finding out more about what’s available to you.
- Allowable Expenses: Did you know that there are certain business expenses you can deduct from your tax bill? Whether you’re self-employed or run a limited company, understanding allowable expenses means that you won’t pay an more tax than you have to.
- Employment Allowance: Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £4,000. You’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £4,000 has gone or the tax year ends (whichever is sooner). Find out more on the UK Government website.
Make sure you’re prepared
Given the many challenges that small businesses face on a regular basis, a rise in national insurance is just another hurdle. However, taking early action and preparing properly for changes will help you minimise the impact on your business.
All links are checked and valid at time of publishing, 13 June 2023.
