The Tax Increase we feared... National Insurance Explained
GP Practices have had a few financial obstacles put in its way this year. Firstly there was the 3% pay rise for staff which I have covered before. But more recently, there was an increase in National Insurance (NI) contributions and in the budget last week, an increase to the minimum wage to £9.50 an hour. Financial experts feel the NI changes alone will mean an average loss of £15,000 a year to the average GP surgery. I feel NI is a very confusing tax to understand compared to income tax, so I thought I'd try to break it down as easily as I can.
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| Remember these... they don't make them anymore sadly |
National insurance (NI) scheme is very odd system. Instead of income tax which is paid cumulatively through the year, NI is paid on a per payment basis. Also unlike income tax, you get 'benefits' that you acquire if you have a NI record. These include a state pension (you need 35 years of NI contributions to claim full state pension - you can check how many years you have on the HMRC website) and various benefits if you were to stop working (job-seekers allowance, maternity allowance, bereavement support). There are 3 different sections that are likely important to doctors: employed, employer and self-employed.
Employed
Employer
Importantly for GP practices (and other businesses), the employer has to pay NI contributions on behalf of their employee. This is where the hit to businesses comes when they announce NI rises.
It starts at the secondary threshold (ST) which is currently £737 monthly (£8,840 yearly). Above this, the employer pays 13.8% of your earnings as Employer Class 1 NI, which is quite a lot really. Next tax year, the ST moves up to £758 monthly (£9,100 yearly) and the contributions increase to an eye-watering 15.05%.
There are other thresholds and rules for under 21's and apprentices but I haven't mentioned it here.
Self-Employed
This is paid at the end of the tax year, and it is calculated from annual profits, not monthly like a salary.
If your profits are below £6,515 for 2021-2022 tax year then you don't have to pay what is deemed Class 2 National Insurance. This level is called the Small Profits Threshold (SMT) and above it you have to pay £3.05 a week. This will change next tax year (2022-2023), when the SMT rises to £6,725 and the contributions rise to £3.15 a week. If profits do not reach the SMT, then you can make voluntary Class 2 contributions so you can get the benefits of NI contributions.
This continues until you reach the next threshold, the Lower Profits Limit (LPL) which is £9,568 for this year (next tax year it will be £9,880). Above this level, you would also pay 9% of profits (next tax year, this will change to 10.25%) - this is called Class 4 NI contributions. This goes up to the Upper Profits Limit (UPL) which is £50,270 this tax year; any profits made above this is 'taxed' at 2% (next tax year it will be 3.25%).
Minimum Wage
Also in the budget was the increase in the minimum wage to £9.50/hour. This also will likely have an effect on business as well. Not only will this lead to an increase in staff wages, it will mean more NI employer payments and employer pension contributions. Also likely not factored is the possible uplifting of all staff salary to maintain different grades of pay. All this will affect businesses bottom line. Already some businesses have said they will have to increase prices on their products to cater for it, like this brewer saying it will translate to 30p extra on the cost of a pint. If products have to go up in price for this and with the NI increases, it may negate any real-world effect of the wage increase.
Obviously Covid has been tough economically for the country, and these measures are all part of repaying the debt needed to get us through it. With inflation touted at 4% and who knows what other measures coming up, we will just have to extra careful with our pennies.
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