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NICs rise shelved: Reversal or reduction?

by Ian Holloway – Payroll Consultant, Payroll Profession

The government’s U-turn on NICs is not quite a reversal, more another change for software developers to implement and employers to communicate to employees, writes Ian Holloway.

The 1.25 percentage point increase and the new statutory deduction (known as the Health and Social Care Levy) have been shelved, as confirmed ahead of today’s ‘fiscal event’ (now referred to as a statement for the new Prime Minister’s ‘Growth Plan’).

The date of the latest changes to National Insurance in tax year 2022/23 is 6 November 2022, but how will the changes actually be enacted? What do employers, software providers and payroll professionals need to get their heads around? And what will happen to the NHS and Social Care funds now? To answer these questions, we need to look at what’s gone before.

A brief history

The Health and Social Care Levy Act 2021 increased the percentage rate of National Insurance Contributions (NICs) by 1.25% for the following:

• Class 1 (Primary and Secondary), excluding people over State Pension age (SPa);
• Class 1A;
• Class 1B; and,
• Class 4.

This was announced in the UK Government’s Build Back Better – our Plan for Health and Social Care Policy Paper with the intention of funding plans for healthcare and adult social care in England. Whilst the increase would fund plans for England, the devolved administrations in Scotland, Wales and Northern Ireland would receive equivalent monies for their own healthcare and social care plans.

The 1.25 percentage point increase was intended to work as follows:

• In 2022/23 – additional monies raised by increased NICs to fund plans to tackle the NHS backlog caused by the Covid-19 pandemic
• In 2023/24 – the removal of the 1.25 percentage point increase to NICs but the creation of a new but unnamed statutory deduction which was to be referred to as the Health and Social Care Levy.

A brief voting history

During the Conservative Party leadership contest in the summer of 2022, new Prime Minister Liz Truss voiced her opposition to the increase, pledging to reverse the move. This opposition has been supported by the new Chancellor of the Exchequer Kwasi Kwarteng. It is worth looking at how these politicians voted in Parliament for the 2021 Act:

• Liz Truss – ‘Aye’ ie supportive of the increase
• Kwasi Kwarteng – ‘no vote recorded’.

The reversal

There was much speculation that the reversal would happen, all in the name of putting money back into people’s pockets. Much has also been said about the fact this will benefit some people more than others — ie the ones paying more NICs would benefit the most and low earners (or people not paying NICs at all) would benefit the least.

Perhaps the least-debated topic is how this change will actually be enacted. In my mind, it isn’t remotely possible for payroll professionals to simply reverse the NICs increase as if it had never happened:

• Would we have to re-run payrolls going back to April 2022? And what about the employees who had started and left during this time, to say nothing of the associated administration?
• Would there be a massive reduction in the NICs percentage from, say, January 2023 that would have the monetary effect of making it look as though the increase had never happened? Possibly OK for those who have remained with the same employer but, again, what about those who have started or left, and let’s be real, the employees where there have been mistakes such as over or underpayments?
• Perhaps, given that HMRC has all of the necessary information about NICs, mostly operated non-cumulatively, would they be best placed to make the repayments to employees (and employers)? Of course, this opens up the question of whether they can do it given that changes always seem to be more difficult for HMRC than they are for payroll and software developer professionals.

So many questions from a simple leadership election pledge to reverse the 1.25 percentage point increase.

Legislatively

The Health and Social Care Levy (Repeal) Bill will repeal the above 2021 Act of Parliament. This will have to have a swift Parliamentary passage when they return from their latest recess. The Health and Social Care Levy will therefore not apply from April 2023. This is good news for software developers who no longer have to concern themselves with this development.

Yet it is not quite that simple.

The NICs percentages REDUCE from 6 November 2022. This is not a backdated reversal. Where the employee is not a director and paying NICs on an annual basis, ie cumulatively, for paydays on or after 6 November 2022, the NICs percentages are reduced to those that applied in tax year 2021/22. So, for example, the employee’s standard rate of 13.25% reduces to 12% and the employer’s from 15.05 to 13.8%.

However, the tax year is broken down into two parts: one for the first seven months of the tax year (6 April to 5 November 2022) and a second for the remaining five months (6 November 2022 to 5 April 2023). Overall, therefore, assuming the above standard rates:

• The main Primary rate increased from 12% to 13.25% in month 1, reducing to 12% in month 8. Over the course of the tax year, the actual NICs payable will be 12.73%, calculated as seven months at 13.25 (92.75) and five months at 12 (60): 92.75 + 60 / 12 = 12.73%
• The main Secondary rate increased from 13.8% to 15.25% in month 1, reducing to 13.8% in month 8. Over the course of the tax year, the actual NIC payable by the employer will be 14.53%, calculated as seven months at 15.05 (105.35) and five months at 13.8 (69): 105.35 + 69 / 12 = 14.53%

These calculations enable us to understand the other rates that are detailed in the 2022 Bill:

• Class 1A NICs on ‘certain termination awards and sporting testimonial payments’ (ie through the payroll) reduces to 13.8% if the payment is made on or after 06 November 2022
• Class 1A NICs on benefits-in-kind (ie outside of the payroll) are calculated at 14.53% using the pro-rata calculation
• Class 1B NICs (PAYE settlement agreements) are calculated at 14.53%
• Directors’ NICs (payable on an annual cumulative basis) are payable at 12.73%, with 2.73% applying to earnings over the Upper Earnings Limit. The directors’ employer will pay NICs at 14.53%
• The annual maximum value of NICs for those with more than one employment will change to 12.73%.

Operatively

Simply, payroll software must be updated to apply to payrolls that pay on and after 6 November 2022 (month 8 onwards). Later guidance from HMRC may say it can be effected at a later date and backdated to November. However, that is unusually complicated for payroll software that operates NICs non-cumulatively.

As per the press release, it is almost certain that HMRC’s guidance will indicate that employees should contact their employers in the first instance for refunds.

Action

You have to have sympathy for employers and software developers, as this will be the third change to National Insurance in one tax year:

1. When the increased percentages came into effect in April 2022 together with an amendment to the NI thresholds
2. When the Primary Threshold was updated from 6 July 2022
3. The lowered NI percentages to apply from 6 November 2022.

However, it is the software developer that will be instrumental in effecting this in a timely manner, as the very last thing we want is to be unable to make changes for paydays on or after 6 November 2022.

This is particularly important for employers that pay employees at or around the first day of the tax month. Quite often, employers will be processing this payroll in the month or weeks before. So, it is a possibility that payments made on or around 6 November 2022 will have to use NICs percentages before the legislation receives Royal Assent.

Contact your software provider but be kind!

What happens to the NHS and Social Care now?

Remember that the funds from the levy were due to be ring-fenced for spending on NHS England and England’s social care policy (with monies being given to the devolved nations for their own policies). If that money is no longer being raised, does this mean the policies will actually be carried out?

The ‘fiscal event’ confirmed these policies will still go ahead and monies will be allocated as if the monies had been raised from increased NICs and the new Levy from 2023. The difference, however, is that the funding will be achieved by UK Government borrowing.

I think this is the clearest indication of ‘Trussonomics’ in action we’ve seen so far.

This article was briefly unpublished from the site to check the percentage figures in the ‘Legislatively’ section. A percentage for the Director’s NIC was changed from 6.58% read 2.73%.