Recent changes to National Insurance Contributions (NICs) in the UK are set to impact millions of employees, including those in the small and medium-sized enterprise (SME) sector.

We have been working closely with many of our clients to help break down the key aspects of these changes and offer tax advisory insights to help them prepare for what lies ahead.

Here’s some of our thoughts on the subject.

Changes for employees

From 6 January, a significant change in NICs will come into effect for employees.

Previously, the NIC rate stood at 12 per cent on earnings between £12,571 and £50,270.

However, this rate is being reduced to 10 per cent, potentially saving the average full-time wage earner around £450 annually.

Most analysis, however, points out that the NICs reduction will only incur higher taxes later down the line, so the actual benefit to employees is likely to be minimal.

Impact on the self-employed

Self-employed individuals are also facing alterations in NICs.

Starting from 6 April 2024, self-employed professionals will pay eight per cent on profits falling between £12,571 and £50,270, down from the previous nine per cent rate.

Additionally, the separate Class 2 NIC contributions will be eliminated.

For those earning £28,200, these changes could result in savings of approximately £350 per year.

National Insurance thresholds

The government has also decided to freeze the National Insurance threshold at £12,570 until 2028.

As wages increase, more employees will find themselves liable for National Insurance payments.

This has implications for SMEs, particularly when hiring new staff or considering salary adjustments.

The wider tax landscape

It’s not just National Insurance that’s changing.

The freezing of thresholds for both National Insurance and Income Tax until 2028 will result in 3.2 million more taxpayers and 2.6 million higher-rate taxpayers by 2028.

This policy aims to generate an additional £25.5 billion a year by 2027-28.

For employees earning £35,000, this could translate to an extra £440 in direct tax annually by 2027-28.

Preparing your business

As an SME business owner or entrepreneur, what can you do to prepare for these changes?

• Review your payroll: Ensure your payroll system is updated to reflect the new NIC rates for employees and the self-employed. Compliance is key to avoiding penalties.
• Consider compensation strategies: As thresholds remain frozen, consider the impact on your employees’ take-home pay. Exploring compensation strategies can help retain and attract talent.
• Financial planning: Consult with tax advisors to assess the broader financial implications for your business. Understanding the tax landscape is crucial for strategic decision-making.
• Stay informed: Tax policies evolve, and it’s vital to stay informed about future changes that may affect your business. Regularly engage with tax experts to stay ahead of the curve.

As an SME business owner or an entrepreneur, being prepared is the key to navigating these alterations successfully.

By understanding the impact on your payroll, tax liabilities, and bottom line, you can make informed decisions to ensure your business remains resilient in the face of evolving taxation.

If you have specific questions or require tailored advice for your SME, don’t hesitate to reach out.