Sarah Bradford explains changes to National Insurance contributions taking effect during the tax year 2022/23.
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The National Insurance contributions (NICs) rates and thresholds that were to apply for the 2022/23 tax year had already been announced and given legislative effect when the Chancellor delivered his Spring Statement in March 2022.
Against a backdrop of rising inflation and spiralling energy crises, there had been calls for the government to abandon or delay the 1.25% rate increases applying to Classes 1, 1A, 1B and 4 NICs for 2022/23, pending the introduction of the health and social care levy from 6 April 2023. The Chancellor did not bow to that pressure, but he did accelerate the alignment of the primary threshold and Class 4 NICs lower profits limit with the personal allowance, which had been promised by the end of the current parliament. The figures will be aligned from 6 July 2022. As this is partway through the tax year 2022/23 tax year, the figures will be fully aligned from the tax year 2023/24.
The Chancellor also announced an increase in the National Insurance employment allowance, effective for the 2022/23 tax year.
The changes announced at the time of the Spring Statement were given legislative effect in the National Insurance (Increase of Thresholds) Act 2022. The Act also paved the way for changes to Class 2 NICs.
Class 1 NICs
Class 1 NICs are payable by employers and employees. Employees pay primary Class 1 NICs on their earnings to the extent that they increase the primary threshold. Contributions are payable at the main rate (13.25% for 2022/23) on earnings between the primary threshold and the upper earnings limit, and at the additional rate (3.25% for 2022/23) on earnings in excess of the upper earnings limit.
Where an employee has earnings between the lower earnings limit and the primary threshold, they are treated as if they had paid primary Class 1 NICs at a notional zero rate. This has the effect of making the year a qualifying year for state pension and contributory benefit purposes without it actually costing the employee anything in NICs.
The lower earnings limit is set at £123 per week (£533 per month or £6,396 per year) and the upper earnings limit at £967 per week (£4,189 per month or £50,270 per year).
The primary threshold was originally set at £190 per week (£823 per month or £9,880 per year) for 2022/23 and remains at this level for the period from 6 April 2022 to 5 July 2022. However, the primary threshold has been aligned with the personal allowance of £12,570 from 6 July 2022, and from that date, the threshold is set at £242 per week (£1,048 per month or £12,570 per year). However, as the increase does not take effect until 6 July 2022, the annualised primary threshold for 2022/23 (relevant for company directors who have an annual earnings period) is £11,908 (not £12,570). This is equivalent to £229 per week. The primary threshold will be fully aligned with the personal allowance (frozen at £12,570 until April 2026) from the 2023/24 tax year.
It is important to note that the increase in the primary threshold does not take effect until 6 July; it has no relevance to payments made before that date, to which the previously announced threshold continues to apply. When calculating employee’s Class 1 NICs, the primary threshold corresponding to the tax week or month in which the payment was made must be used. The increase in the primary threshold will mean that employees with earnings of more than £190 per week or £823 per month will pay less NICs from 6 July 2022 onwards.
The secondary threshold for 2022/23 is unchanged, remaining at £175 per week (£758 per month or £9,100 per year) with the higher secondary threshold applying to the earnings of employees under the age of 21, apprentices under the age of 25 and armed forces veterans in the first year of their first civilian employment since leaving the armed forces (£967 per week or £4,189 per month and £50,270 per year) and to the earnings of new Freeport employees where the employer has physical premises in a Freeport Tax Zone (£481 per week, £2,083 per month or £25,000 per year). The secondary rate is set at 15.05% for 2022/23.
The following examples illustrate the impact of the change in the primary threshold on the amount of NICs payable by the employee.
Example 1: Increase in primary threshold
Alice is paid £400 per week. She is 27 years old.
Prior to 6 July 2022, she will pay Class 1 NICs of £27.69 (13.25% (£400 - £190)) on a week’s pay.
From 6 July 2022, she will pay Class 1 NICs of £20.93 (13.25% (£400 - £242)).
In each case, her employer will pay employer’s Class 1 NICs of £33.86 (15.05% (£400 - £175)).
The increase in the primary threshold reduces the NICs that Alice pays by £6.76 per week.
Example 2: Before and after
Craig has earnings of £3,000 per month.
For the first three months of 2022/23, he will pay primary Class 1 NICs of £288.45 per month (13.25% (£3,000 - £823)). From July 2022 to March 2023, he will pay primary NICs of £258.64 per month (13.25% (£3,000 - £1,048)).
As a result of the increase in the primary threshold, he pays £29.81 less in NICs from July onwards.
His employer pays employer’s Class 1 NICs of £337.42 per month (15.05% (£3,000 - £758)).
Example 3: Annual earnings period
David is a company director. He has earnings of £60,000 in 2022/23. As a director, he has an annual earnings period and will pay primary Class 1 NICs of £5,399.20 ((13.25% (£50,270 - £11,908) + (3.25% (£60,000 - £50,270)).
His employer will pay secondary contributions of £6,744.25 (15.05% (£60,000 - £9,100)).
Employment allowance
Eligible employers can claim the employment allowance, which can be set against their secondary Class 1 NICs liability. The allowance was originally set at £4,000 for 2022/23 but has now been increased to £5,000. The allowance is capped at the employer’s secondary Class 1 NICs liability for the year. It is not available to employers whose secondary Class 1 NICs liability for 2021/22 was £100,000 or above, or to companies where the sole employee is also a director (meaning most personal companies are not eligible for the allowance).
The employment allowance must be claimed through the payroll; it is not given automatically, even if the employer claimed it last year.
Class 4 NICs
The self-employed pay Class 4 NICs (in addition to Class 2 NICs) if their profits are more than the lower profits limit. The lower profits limit is aligned with the primary threshold applying for Class 1 NICs purposes. It was originally set at £9,880 for 2022/23 but, in line with the increase in the primary threshold, it is increased to £11,908 for 2022/23.
Contributions are payable at the main Class 4 NICs rate (10.25% for 2022/23) on profits between the lower profits limit and the upper profits limit (£50,270 for 2022/23 in line with the upper earnings limit applying for Class 1 NICs purposes). Class 4 contributions are payable at the additional Class 4 NICs rate of 3.25% on profits in excess of the upper earnings limit.
Class 2 NICs
Class 2 NICs are flat-rate contributions payable by the self-employed in addition to any Class 4 contributions payable. They must be paid where profits exceed the small profits limit (£6,725 for 2022/23) but can be paid voluntarily where profits are less than this. Payment of Class 2 contributions is the mechanism by which the self-employed earn entitlement to the state pension and contributory benefits. The rate is set at £3.15 per week for 2022/23.
The National Insurance Contributions (Increase of Thresholds) Act 2022 makes provision for regulations to be made for the purposes of aligning the small profits threshold with the lower earnings limit for Class 4 NICs purposes (set at £11,908 for 2022/23). It also provides for the making of regulations, with retrospective effect no earlier than 6 April 2022, for a self-employed earner whose profits are below the threshold to be treated as having paid Class 2 NICs. This will bring them into line with lower paid employees by allowing them to secure a qualifying year for zero contribution cost. It will also make the payment of Class 2 contributions voluntarily redundant.
Practical tip
Make sure that you are using the revised thresholds and limits to calculate NICs for 2022/23, and that changes to the primary threshold are applied from 6 July 2022 only.
