Practical guide: navigating the complicated 2022/23 NI landscape

Recap

Pending the introduction of the now cancelled Health and Social Care Levy, the rates of Class 1 (primary and secondary), Class 1A, Class 1B and Class 4 NI were increased by 1.25% for 2022/23 only.

The purpose of the increase was to provide ring-fenced funding for health and adult social care prior to the introduction of the levy, which was to come into effect from 6 April 2023 and which would have applied to earnings liable to a Class 1, Class 1A, Class 1B or a Class 4 contribution. The NI rates were due to revert to their 2021/22 levels once the levy was introduced.

After some initial criticism, the payment thresholds for Class 1 (primary), Class 2 and Class 4 were all increased from 6 July 2022 to mitigate the effect of the NI rate increase on the lowest earners.

Rate reversal

On 22 September, one day before presenting his first, and as it transpired his last, fiscal event, then Chancellor Kwasi Kwarteng announced that the NI rates would be reversed from 6 November 2022, and that the Health and Social Care Levy would be scrapped. Legislation to give effect to this was introduced before Parliament, and was not repealed like most of the other mini-Budget announcements.

Subject to any changes in November's main Budget, this means this means that the combination of rates and thresholds has now changed three times in 2022/23. The effect will depend on the NI class paid.

Employers - Class 1

The rate of secondary Class 1 NI was initially set at 15.05% for 2022/23, the rate having been increased by 1.25% from the 2021/22 level of 13.8%.

As a result of the reversal, from 6 November 2022 employers will pay secondary Class 1 NI at a rate of 15.05% on the employees’ earnings to the extent that they exceed the relevant secondary threshold where the earnings are paid between 6 April 2022 and 5 November 2022 and at the rate of 13.8% on earnings paid between 6 November 2022 and 5 April 2023.

Employers - Class 1A and 1B

Employers are also liable for Class 1A and Class 1B NI. The rate of Class 1A and Class 1B contributions is linked to the rate of secondary Class 1. The rate of Class 1A and Class 1B contributions for 2022/23 was initially set at 15.05%.

As a result of the rate change from 6 November 2022, the rate of Class 1A NI on benefits in kind, and Class 1B NI (payable where a PAYE settlement agreement is in place) is a composite rate of 14.53% for 2022/23.

However, the Class 1A rate payable on taxable termination payments in excess of £30,000 and on taxable sporting testimonial payments in excess of £100,000 is simply the secondary Class 1 rate prevailing at the time that the payment is made; 15.05% where the payment is made in the period from 6 April 2022 to 5 November 2022 and 13.8% where the payment is made in the period from 6 November 2022 to 5 April 2023.

Ensure your payroll software is updated before making any payments on or after 6 November 2022. Correcting errors after the event will be trickier than collecting the correct contributions at the time.

Employees

The calculation of employees’ Class 1 NI for 2022/23 has already been subject to a mid-year change. The primary threshold was increased from £190 per week (£823 per month; £9,880 per year) to £242 per week (£1,048 per month; £12,570 per year) from 6 July 2022.

Both the main rate and the additional primary rate were increased by 1.25% from 6 April 2022 to 13.25% and 3.25% respectively. This increase is to be reversed from 6 November 2022.

As a result, for the period from 6 April 2022 to 5 November 2022, employees will pay Class 1 NI at a main rate of 13.25% on earnings between the relevant primary threshold and the upper earnings limit (set at £967 per week; £4,189 per month and £50,270 per year) and at the additional rate of 3.25% on earnings above the upper earnings limit.

From 6 November 2022, contributions are payable at a main rate of 12% on earnings between the primary threshold and the upper earnings limit and at an additional rate of 2% on earnings in excess of the upper earnings limit.

You should communicate the changes to employees to avoid any confusion.

Directors

Company directors have an annual earnings period for NI. As a result of the change in the primary threshold from 6 July 2022, the annual primary threshold for directors for 2022/23 is £11,908.

To calculate a director’s NI liability for 2022/23, an annualised rate applies for both employers’ and employees’ contributions. This takes into account the November 2022 rate change. The annual rate for employers’ contributions, payable on earnings above the relevant secondary threshold, is 14.53%. Company directors will pay employee contributions at a main rate of 12.73% on earnings between the primary threshold of £11,908 and the upper earnings limit of £50,270 and at an additional rate of 2.73% on earnings above £50,270.

Where the alternative arrangements are used, contributions will originally be assessed as for other employees at the prevailing rate at the time that the payment is made. However, a recalculation must be made using the annual rates and annual threshold when making the final payment for the year.

Self-employed traders

The self-employed pay flat rate Class 2 NI and also Class 4 NI on profits to the extent that they exceed the lower profits limit.

The main rate of Class 4 NI (payable on earnings between the lower profits limit of £11,908 and the upper profits limit of £50,270) was initially set at 10.25%, while the additional rate (payable on profits in excess of the upper profits limit) was initially set at 3.25%, the rates having been increased by 1.25% for 2022/23.

However, as a result of the reversal of the increase with effect from 6 November 2022 (taking the rates back to 9% and 2% respectively), composite rates apply. Accordingly, the main Class 4 rate is now 9.73% for the 2022/23 tax year and the additional Class 4 rate is 2.73%. There is no need to apportion profits and apply the rates applicable before and after 6 November 2022 separately. Class 2 NI is a fixed weekly amount, and is unaffected by the November 2022 change.