29 November 2022
It is fair to say that the 2022/23 tax year has been a challenge to many, not least payroll teams who have had to manage unprecedented ‘in year’ changes to both employee and employer National Insurance contributions (NICs) rates and the NICs primary threshold. Following the latest changes, effective from 6 November 2022, it is important to ensure that payroll teams and others involved in P11D and PAYE settlement agreement (PSA) compliance are up to date with the all changes and that these have been communicated appropriately to employees.
Back in September 2021, plans were announced for the introduction of the Health and Social Care Levy (HSCL). For the 2022/23 tax year this was to be collected by means of a 1.25% increase in NICs rates from April 2022. Fast forward one year to September 2022 and the Health and Social Care Levy (Repeal) Bill was introduced, reversing the NICs change and scrapping the HSCL altogether, receiving royal assent on 25 October 2022.
It had also been announced in the Spring Statement in March 2022 that the primary threshold, at which employees start to pay NICs, was to be increased from £9,880 to £12,570 from July 2022. This change has occurred and will remain in place for the remainder of the 2022/23 tax year.
A summary of the changes is shown in the following table:
|From 6 November 2022 to 5 April 2023||From 6 April 2022 to 5 November 2022|
|Employee Class 1 NICs rate between the primary threshold and upper earnings limit||12.00%||13.25%|
|Employee Class 1 NICs rate above the upper earnings limit||2.00%||3.25%|
|Employer Class 1 NICs rate||13.80%||15.05%|
|Statutory directors’ Class 1 NICs rate between the primary threshold and upper earnings limit||12.73% (blended rate)|
|Statutory directors’ Class 1 NICs rate above the upper earnings limit||2.73% (blended rate)|
|Statutory directors’ employer Class 1 NICs rate above the secondary threshold||14.53% (blended rate)|
|Class 1A NICs benefits||14.53% (blended rate)|
|Real time Class 1A NICs termination payments||13.80%||15.05%|
|Class 1B NICs||14.53% (blended rate)|
Impact on forms P11D and PSA
Employers pay Class 1A NICs on most taxable benefits reported on form P11D and Class 1B NICs on benefits included in the annual PSA computation. Following the in-year changes to NICs rates, it has been announced that a blended rate of 14.53% employer Class 1A and Class 1B NICs will apply for the whole of the 2022/23 tax year.
Impact on taxable termination payments subject to ‘real time’ Class 1A NICs
Employer only Class 1A NICs on relevant termination payments exceeding £30,000 are due at the rate applicable at the time of the actual payment, not the termination date if earlier. On this basis, payments made up to and including 5 November 2022 are subject to real time Class 1A NICs at 15.05% and those made from 6 November to 5 April 2023 are subject to real time Class 1A NICs at 13.8%.
Impact on payments to statutory directors including non-executive directors
Whilst statutory directors may be paid a regular salary each month, their earnings for NICs purposes must be calculated on an annual earnings basis. In practice, many employers calculate NICs for directors based on their pay for the pay period (eg monthly) in the normal way, and simply reconcile the amount paid at the end of the tax year on an annual earnings period basis.
For the 2022/23 tax year, it has been announced that blended rates of NICs of 12.73% and 2.73% for directors’ employee Class 1 NICs, and 14.53% for the employer’s Class 1 NICs will apply for the whole year. This will result in some anomalies, for example where NICs on payments to directors in the period from 6 April 2022 to 5 November 2022 have already been calculated at the higher rates of 13.25% and 3.25% for employee NICs and 15.05% for employer NICs. As yet no announcement has been made as to how this differential will be addressed, but in cases where bonuses have been paid in the period from 6 April 2022 to 5 November 2022 this could result in a sizeable overpayment of Class 1 NICs in that period.
Timing issues for the change of rates from 6 November 2022
HMRC has acknowledged that some employers may have been unable to update their payroll software by 6 November 2022, meaning that employees may not benefit immediately from the in-year reduction in NICs rates. It is important for employers to check whether or not their November 2022 payroll will reflect the changes – if not, communication of this to employees, ideally before the first affected payroll run, is recommended to manage expectations.
Where the software update has not been done in time for November 2022 payroll processing, employees should still receive the benefit retrospectively once updates have been applied. However, difficulties may arise and will need to be managed on a case-by-case basis, such as where an employee leaves the company before the adjustment has been made.
Technically, where the change could not be made between the last pre and first post 6 November 2022 payroll runs, the RTI return(s) for affected payments will also be incorrect and will need to be amended when the retrospective adjustment is made.
In summary, the changes will put pressure on payroll teams and where changes cannot be made before the first payroll run post 6 November 2022, it is important to communicate this to employees. Further announcements are expected from HMRC in due course in relation to dealing with practical issues such as director NICs overpayments.
For more information, please get in touch with David Williams-Richardson or your usual RSM contact.