The calculation of Class 1 National Insurance contributions is complicated for 2022/23 by the in-year change to the primary threshold. This is the point at which employees start paying National Insurance contributions on their earnings.
From 6 April 2022 until 5 July 2022, the primary threshold is set at £190 per week (£823 per month). This is equivalent to £9,880 per year. However, from 6 July 2022, the primary threshold is aligned with the personal allowance, set at £12,570. As a result, from 6 July 2022 the primary threshold is £242 per week (£1,048 per month).
As the increase in the primary threshold does not take effect until part way through the tax year, the annual threshold for 2022/23 is £11,908. This is of relevance to directors who have an annual earnings period regardless of their actual pay interval. The annual primary threshold of £11,908 is equivalent to £229 per week.
For 2022/23 employees pay primary Class 1 contributions at the main rate of 13.25% on earnings between the primary threshold and the upper earnings limit (set at £967 per week; £4,189 per month; £50,270 per year) and at the additional rate of 3.25% on earnings in excess of the upper earnings limit.
The secondary threshold is set at £175 per week (£758 per month; £9,100 per year) for 2022/23. This is the point at which employer’s Class 1 National Insurance contributions start. The threshold remains the same for the full tax year; unlike the primary threshold it does not change on 6 July 2022.
Higher thresholds apply where the employee is under 21, an apprentice under the age of 25 or armed forces veteran in the first year of their first civilian employment since leaving the armed forces (all set at £967 per week, £4,189 per month; £50,270 per year) or a new Freeport employee where the employer has physical premises in a Freeport Tax Zone (set at £481 per week; £2,083 per month; £25,000 per year).
The secondary Class 1 rate is 15.05% for 2022/23.
It is important that the thresholds used are those that apply at the time that the payment is made; the higher primary threshold should not be used where payment is made before 6 July 2022.
Eligible employers can claim the National Insurance Employment Allowance which reduces the amount of employer’s Class 1 National Insurance that they pay. The allowance is not available to employers whose secondary Class 1 liability in 2021/22 was £100,000 or more. Personal companies where the sole employee is also a director are not able to benefit from the allowance either (although it can be claimed
by family companies with at least two employees).
The allowance is set at £5,000 for 2022/23. It can be claimed through the payroll. Where the employer’s Class 1 liability for 2022/23 is less than £5,000, the allowance is capped at the liability for the year.
Class 4 National Insurance contributions are paid by the self-employed where their profits are more than the lower profits limit. This is aligned with the annual primary threshold, and is set at £11,908 for 2022/23. Contributions are payable at the main Class 4 rate (10.25% for 2022/23) on earnings between the lower profits limit and the upper profits limit, set at £50,270 for 2022/23, and at the additional Class 4 rate of 3.25% on earnings in excess of the upper profits limit.
Currently Class 2 contributions are payable by the self-employed where profits exceed the small profits threshold, set at £6,725 for 2022/23. Where profits are less than this, Class 2 contributions can be paid voluntarily to maintain the earner’s contribution record.
However, new legislation provides for regulations to be made to align the starting point for Class 2 contributions with that for Class 4 (£11,908 for 2022/23) and also for regulations to be made, with retrospective effect no earlier than 6 April 2022, for self-employed earners with profits below the new threshold and at least equal to the small profits threshold to be treated as if they have paid a Class 2 contribution. This will provide them with a qualifying year for zero contribution cost.
At the time of writing the regulations to give effect to this measure had not yet been made.