Forget the opinions. Time to focus on the facts –  National insurance

We are sure most people with a pulse have an opinion on recent political events, but fear not, we are not going to bore you with ours. Much more important, to our mind, is the potential confusion that has been sown by the mini-Budget and its almost (but not quite) total reversal. So, what does the potential 2023-24 UK tax system actually look like now. This series of posts will deal with one tax at a time over the next few weeks.

Perversely, I am going to start with 2022-23, because that is necessary to understand where we are and will be with:

National insurance and the social care levy

From 6th April 2022 a 1.5% levy was added to national insurance (both employers’ and employees’) to help pay for an overhaul of the social care system. From 6th November 2022 this social care levy is withdrawn, so the main rate of employee’s NI reverts to 12% and the employers’ main Ni rate to 13.8%. Easy. Except of course, it isn’t,

This is fine for employees, who pay national insurance weekly or monthly and will simply pay less of it from their November pay day. But what about the self-employed who pay Class 4 national insurance, and company directors, who have an annual earnings period for national insurance?

For the self-employed things are reasonably straightforward. 7/12 of their 2022-23 Class 4 NI liability will be calculated at 10.25% and 5/12 at 9%. which equates to a composite rate of roughly 9.73%. This applies to profits earned in the accounting period ending between 6th April 2022 and 5th April 2023.

But what about company directors? This is where it gets more complicated. Strictly, directors’ national insurance should be calculated and paid on a cumulative basis over the tax year, so that they start off paying 0% in April and end up paying the full rate on all salary by the end of the tax year. An example is the best way to explain:

From 6.4.22 to 5.11.22 the employees’ and employers’ NI rates and bands for an annual earnings period were as follows:

Employees	Band	Rate	Employers	Band	Rate
	£0 – £11,908	0%		£0 – £9,100	0%
	£11,909-£50,270	13.25%		£9,101+	15.05%
	£50,271+	3.25%

From 6.11.22 the rates (except obviously the zero rates) are reduced by 1.25%.

For a director, this creates an odd pattern of national insurance payments. Say (s)he has a monthly salary of £5,000. The pattern of NI payment is as follows:

April 2022   No employee or employer NI

May 2022    No employee NI, employer NI on (£10,000 – £9,100) = £900 * 15.05% = £135,45

June 2022   Employee NI on (£15,000 – £11.908) = £3.092 * 13,25% = £409.69

Employer NI £5,000 @ £15.05% = £752.50

July to October 2022:  Employee NI each month £5,000 * 13.25% = £662.50

Employer NI each month as above = £752.50

Many directors simply receive a monthly salary with no bonuses or other variable payments and want to smooth their Ni payments so that they net the same amount each month. Many companies therefore effectively use a monthly earnings period for directors, because the overall result at the end of the year with a basic monthly salary is exactly the same as for an employee

However, all of this gets more complicated when the NI rate changes part way through the year. Rather like the self-employed position, directors have composite rates of national insurance for their 2022-23 annual earnings period, being:

Employees’ NI     12.73%

Employers’ NI     14.5292%

Which is fine if the director’s NI is being computed on the strict annual earnings basis, but what if it is being informally calculated on the monthly basis?

This works out OK if the director’s monthly pay remains constant during the year, as the result is the same as that achieved by using the composite rate. However, if (s)he has a pay increase or reduction during the year, the two calculations diverge, and the monthly basis does not produce the right amount of NI.

An adjustment is therefore required (we suggest at the end of the tax year) to ensure that the correct amount of NI has been paid. This will take the form of applying the composite rates to the annual earnings, comparing the result to the NI actually paid, and either paying over or reclaiming the difference, remembering to adjust the employees’ NI in the March 2023 net pay calculation.

So, although this is one of the few mini-Budget changes to survive, it does complicate matters for directors of small and medium-sized companies in particular.

Next week: Corporation tax – an extra rate, associated companies and uncertainty