Julie Tucker
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National Insurance increases: The impact on SMEs

The increase in National Insurance payments to fund social care in the UK is having a negative impact on SMEs. From 6th April, employers and employees have seen their NI contributions increase by 1.25% to raise an extra £36 billion for the NHS over the next three years.

Prime Minister Boris Johnson announced the change in autumn 2021 to help the NHS recover after the Covid-19 pandemic. The extra funds will be used to pay for social care and reduce hospital waiting times. However, for Britain’s 11 million SMEs with 250 employees or less, this is a further blow to their recovery.

For larger businesses, it may be a case of “grin and bear it” – but for small businesses and the self-employed, with resources already overstretched, it may feel like the final straw.

How does National Insurance work?

National Insurance is deducted automatically from workers’ salaries through the PAYE tax code. It goes directly to HM Revenues and Customs. Class 1 NI, paid by employers and employees, is based on how much the employee earns.

The employer’s rate prior to the increase was 13.8%, while the rate for employees was 12% of their earnings, up to £50,000 per year. Anything earned over this amount was taxed at 2%.

Despite the government saying in 2019 that it wouldn’t increase NI or income tax as part of the solution for social care funding, it did a U-turn as a result of the pandemic, announcing the 1.25% increase.

What are SMEs’ main concerns?

The NI increase will have the biggest impact on the UK’s small businesses by making it more expensive to employ staff due to the increase in the employers’ NI contributions per employee.

As an example, a staff member would have cost their employer an average of £2,359 per year in National Insurance in the past. After the increase on 6th April, the figure would rise to £2,654 per year.

This means the employer must pay an extra £241 per year for each staff member, incurring extra NI costs of £48,000 a year for a company with 200 employees.

What’s the reaction from small businesses?

Fears have been raised that the increase will devastate small businesses, who haven’t yet recovered from the effects of the pandemic. It will leave them even less money to invest in the company, expand or take on new staff, not to mention the drop in profitability.

Small business leaders fear it will damage the economy further. The average small business will pay between £10,000 and £20,000 extra in NI per year, leaving many unable to hire even one new employee. This could cost an estimated 350,000 prospective new jobs and companies will remain stagnant.

Under the new rules, a sole trader will still lose an extra 1.25 pence for every £1 earned. Seeing as sole traders pay their own salary, this is a direct reduction of income.

Some businesses may have to scale back their plans for growth and won’t be able to give a pay increase to existing staff. In the worst case scenario, there could be pay cuts or redundancies.

Is there any support for businesses?

The pandemic has cost small businesses £126.6 billion to date – double what the government first estimated in 2019. A massive 81% of SMEs in the UK say the government’s financial support packages haven’t been sufficient.

Many of the grants and support funds launched for small businesses during the pandemic have now closed, although there are some regular schemes still available.

The Innovation Funding Service is a government scheme offering small grants for specific purposes via Innovate UK. It could be useful for small businesses needing help with things such as innovation and research, including new tech.

Some local business support may be available through your local authority, although it varies depending on location. It’s worth inquiring about business support grants to fund expert advice or training workshops, for example.

The government’s business support helpline can give business owners advice and may be able to point you in the right direction for financial help from a government-backed scheme.

Some businesses ask a professional accountant for advice on tax relief schemes to help make the most of their finances.

Is it more affordable to hire freelancers?

Some business owners choose to hire freelancers rather than staff employees in a bid to cut costs. It can cost less to hire a freelancer, as they charge an hourly rate, so you pay only for the hours they are needed and don’t waste money on downtime. You also don’t need to pay their PAYE taxes or for statutory holidays.

You may need a freelancer with particular expertise for a certain project, so you can take someone on with one skillset now and another freelancer with different abilities later. This short-term commitment means you’re not paying wages for staff you don’t need.

Could coworking spaces help?

In the same way, working from a coworking space can be more affordable than paying for corporate office space on a long-term contract. The main advantage of coworking is its flexibility, enabling you to work only when you need to. From uniquely designed, inspiring office spaces, where you will be in the company of a community of like-minded people, you won’t be tied to a long and expensive contract.

Contact Headspace Group for information on our affordable co-working solutions.


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