How Changes to National Insurance Impact Small Business
The recent announcement by the government that they are increasing National Insurance would have come as quite a blow for many small businesses who are desperately trying to recover from the pandemic.
Although the increase is for serious reasons, including the struggling NHS and social care system, those who are struggling within business as a direct result of the Covid-19 and the chaos that has caused will feel they are the forgotten ones.
The increase will see an additional tax of 1.25% to pay for employees and employers, which, according to Prime Minister Boris Johnson, will raise an additional £36 billion and help cut the hospital wait times that have now gone up exponentially.
A 1.25% rise won’t be too hard to swallow for medium to larger businesses, but for small and micro self-employed business owners, this increase could have a crippling impact.
As a business owner and seasoned entrepreneur, I (Jürg Widmer) feel I can empathise with those facing challenges and share knowledge where I can.
What are the new National Insurance Changes?
Although the UK government promised in their 2019 manifesto that they would not raise National Insurance to pay for a social care solution. Now they have done a u-turn because the NHS and social care system has been placed under so much pressure due to the pandemic.
The new costs will set employers back by around £6.5 billion, and employees would pay an additional £4.3 billion. The only saving grace is that this rule does not affect until 6th April 2022 (the start of the new tax year).
How do these changes impact small businesses?
As if employing staff wasn’t costly and complicated enough, the increase in National Insurance will be disruptive and a challenging addition for small businesses, making employing staff more expensive.
While the rise appears to be 1.25%, it is really 1.25 percentage points plus 9%. This results in someone employed on the living wage outside of London National Insurance increasing by almost £300 a year! That is for every member of staff, which can add up to a substantial amount for a small business.
The increase in paying staff could mean businesses have less to invest in development and growth. Depending on the size and structure, it could even spell the end for companies on the brink.
What will the National Insurance do to the economy?
These changes could also be a cause for concern for the economy. With the possibility of businesses paying between £10,000 and £20,000 extra a year on around 50 employees, this may deter them from increasing staff and result in a loss of approximately 350,000 jobs.
How does the National Insurance rise impact those self-employed?
Self-employed people will feel this more. As a sole trader, under the new NI rules, for every £1 earned, 1.25 pence will be lost. As of April 2023, NI will return to the current rate.
Many SME’s have felt the cost to their small business, with a majority stating that the government financial help has not been enough.
Steps small businesses can take to lessen the impact of the NI rise.
Ensuring that your accounting is in good order will be a saving grace to help manage and prepare for the changes ahead. A good understanding of your financial position and having the systems in place will lessen the impact and provide greater stability.
As a small business owner, it’s advisable to have an accounting professional onboard to run any queries by and help manage the changes ensuring that all legal requirements are adhered to during the transition. Knowing your figures will also help determine how many staff you could take on during this time for continued growth.
Always keep up to date with the latest government changes and look to see how you can plan for anything that could impact your business and your employees. Knowledge and preparedness are two key elements to survival and success.
Taking action early and preparing well for April 2022 will help minimise the impact of the change in the National Insurance rule.
Thankfully, despite continued challenges, the economy is starting to show signs of recovery and further growth is predicted. The upside is, if you can survive a pandemic and still have a business, there is much to be hopeful for, and things can only get better.