How will National Insurance Contributions increases affect sole traders and landlords?

MPs have voted through Prime Minister Boris Johnson’s 1.25 percentage point increase in National Insurance contributions (NICs), which will be introduced on 6 April 2022.

The NICs rise is part of new government efforts to raise an additional £36bn over three years, money that it says will be used to “tackle the health backlog caused by the Covid pandemic”, with £5.4bn also promised to improve the UK’s ailing social care system.

From 2023, the additional payment will become a separate tax on earned income called the Health and Social Care Levy, which will be calculated in the same way as National Insurance and detailed on payslips. NICs rates will then return to their current level, says the government.

FAIR OR DEEPLY DAMAGING?

Although Johnson described the NICs hike and other measures as “reasonable and fair”, the opposition, several Tory MPs and business groups such as the CBI, Federation of Small Businesses and British Chambers of Commerce, criticised Johnson’s manifesto promise-breaking tax increase.

Some have gone as far as to describe it as an attack on the self-employed. Andy Chamberlain, Director of Policy at the Association of Independent Professionals and the Self-Employed, said: “The increase in National Insurance for sole traders will be deeply damaging to the wider self-employed sector. While social care is, of course, crucial for the country, after the financial devastation of the pandemic, it’s simply not right that hard-working and often struggling people – particularly the scarred self-employed – should be paying for it.”

NATIONAL INSURANCE CONTRIBUTIONS INCREASE IMPLICATIONS FOR SOLE TRADERS

Sole traders pay two types of National Insurance:

• Class 2 (£3.15 a week -2022/23) if their profits are £6,725 or more a year and
• Class 4 if their profits are £9,880 or more a year. (Increasing to £12,570 from July 2022).

Sole traders currently pay 9% Class 4 NICs on profits between £9,568 (£9880 – 2022/23) and £50,270 and then 2% on anything they earn above that. The changes when introduced in April 2022 will mean they will now pay 1.25% more, which equals 10.25% and 3.25% respectively on their profits.

Many sole traders have employees, of course, and if that includes you, then, sadly, you’re facing a double NICs whammy, as Employers’ Class 1 NICs (also known as secondary contributions) will rise from 13.8% to 15.05%, while employees’ Class 1 NICs will rise by 1.25%. So, for example, an employee earning £20,000 a year who currently pays £1,251 in NICs will pay another £130 a year, while those on £30,000 will be faced with a £255 NICs increase.

Need to know! From July 2022, the National Insurance threshold will increase from £9,880 to £12,570.

NICS INCREASE IMPLICATIONS FOR LANDLORDS

Landlords must pay Class 2 NICs if their profits are £6,725 (2022/23) a year or more and they’re running a landlord business (i.e. being a landlord is their main job, they rent out more than one property and buy new properties to rent out, etc). If their profits are below £6,725, a landlord can make voluntary Class 2 NICs payments to get state benefits, such as pension.

You do not pay NICs if you’re not running a [property rental] business  – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

Most landlords are not regarded as running a business, so they would not be impacted by the NIC Class 4 increases.

OTHER TAX CHANGES ANNOUNCED  

As well as having to pay higher National Insurance contributions, directors of small limited companies who receive part of their income from dividend payments will pay more tax from April 2022, which has also attracted criticism.

Tax on dividend income will increase by 1.25%. So, after the £2,000 allowance, those in the basic rate for Income Tax will pay 8.75% on dividend payments (in 2021/22 it was 7.5%), while those in the higher rate Income Tax band will pay 33.75% (in 2021/22 it was 32.5%) and those in the additional rate will pay 39.35% (in 2021/22 it was 38.1%).

Kitty Ussher, chief economist at the Institute of Directors, commented: “The surprise new tax on dividends will yet again target small company directors.

“Incorporated sole traders and other owner-managers, who relied on dividend income, were the only group of workers that were not supported by the government during the pandemic. Employees and the self-employed were provided with financial support to tide them over, but this group was not.”

Ussher said the latest tax increases revealed “a total lack of understanding about the very real difficulties faced by owners of the smallest businesses in Britain”. Some directors of small limited companies may even now “disincorporate” and instead operate as a sole trader business, because the small tax advantages may simply no longer exist.

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