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Under the changes announced yesterday to National Insurance rates, both employers and employees will each be taxed an additional 1.25%. In his speech in parliament Boris Johnson’s reason for the increase was to raise an extra £36bn for the NHS over three years – and help to cut hospital wait times.
How will this affect your business?
As every small business owner knows, National Insurance (NI) is a tax paid by employers and employer earnings. NI automatically deducted from workers’ pay packets via the pay as you earn (PAYE) tax code., Deductions go straight to HM Revenues and Customs (HMRC).
Employers and employees currently pay Class 1 National Insurance, which is based on how much an employee earns. The rate is 13.8% for employers, while employees pay 12% of their earnings, up to £50,000 a year. Any amount earned over this amount is taxed at 2%.
Yesterday, Prime Minister, Boris Johnson announced a 1.25% increase in National Insurance for both employers and employees. The rule change will come into effect on 6 April 2022, at the start of the new tax year. This change will impact small businesses by making employing your staff more expensive.
If you are self-employed, the impact is even bigger. Self-employed workers pay either Class 2 or Class 4 for National Insurance. This is less than SMEs and is taxed on income after business expenses. Under the new rules, if you’re a sole trader then you’ll still lose an additional 1.25 pence for every £1 earned. Given you pay your own salary, a tax on earnings is therefore also a direct reduction of your income.
How can you prepare for the change?
The most important ways to prepare for any change in income is to make sure you have a strong understanding of your current financial position. Speak to your business support professional or accountant to get a rundown of the costs your business would incur from this change and make sure you can afford the new payrolls, and review if you need to make cuts elsewhere.
It makes sense to consider investing in accounting software which will provide you will a relatively low-budget way of analysing your figures. Ensure you remain compliant with the HMRC and it’s requirements, and avoid costly mistakes.
Here at AccountAbility Plus we offer a range of services designed to help you get the best from your business. Our support services can help with with efficient accounts, bookkeeping and payroll. To find out more about how our business support experts can help you please get in touch with us today.