UK Autumn Budget – costs increases for employers

24 November, 2021 · 9 min read

We recently looked at how the autumn budget might increase costs for UK businesses. In this post we’ll take a closer look at these costs, using a case study to see how it might affect your business.

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New measures

In the Autumn budget, two new measures were introduced:

  • The rise in National Minimum Wage from £8.91 to £9.50.
  • The new Health and Social Care Levy – a new 1.25% tax. This is temporarily being introduced as a rise in National Insurance.

Case study

For our case study we’ll look at a fictional business affected by the new measures.

  • The business has two full time employees over the age of 23 working 40 hours per week
  • The total income of the business is £100,000 with expenses of £50,000 in 2021/22 – including all the costs of employing the staff
  • The only difference in 2022/23 is the increased costs
  • We’re disregarding any tax adjustments, claims for relief and losses etc. 
  • We are also disregarding any tax credits, benefits, or other factors outside these two measures

Let’s imagine that in 2021/22 the business made a profit of £50,000. How will these two new measures affect the profit for 2022/2023?

Increased salary cost

  • Each employee will cost an additional (£9.50-£8.91) 59p per hour
  • This works out to an additional (£0.59 x 40 x 52) £1227.20 per employee 

For the two employees then you are looking at an additional (£1227.20 x 2) £2,454.40 in salary payments

Increased Employers National Insurance Contributions (NICs)

Remember that as an employer, salary isn’t your only cost. You also pay Class 1 National Insurance Contributions on your employee’s incomes when they earn over £9,368 per year. 

For 2021/22 this was set at a rate of 13.8%. This is on top of the additional salary you’re required to pay, so you would have paid an additional (13.8% x £2,454.40)  £338.71 in Class 1 employers NIC’s anyway on the additional salary.

However, the new Health and Social Care Levy means that this rate has effectively increased to 15.05%. This means you will need to pay an additional (1.25% x £2,454.40) in NICs i.e. £30.68.

Total cost

This means the total additional cost to the business would be:
Salary – £2,454.40
NIC – £338.71
HSCL – £30.68
Total cost – £2823.79

This means the business profit will reduce from £50,000 to £47,176.21.

Expenses will increase even more depending on the number of employees that are on National Minimum Wage.

It’s also worth noting that the 1.25% tax rise will apply to your personal tax calculation as well as your liability for being an employer – take a look at the example below.

Bringing Tax into account

It’s important to remember that these additional expenses are allowable as deductions when calculating the taxable profit of the business. In reality the actual impact of the increased costs is less than it appears because of tax relief.

Companies are complex because there are numerous different ways to extract funds – which changes the amount of tax that might be paid. For this example we’ll focus on a sole trader and assume they have a full personal allowance to use.

Profit – £50,000
Less Personal Allowance – £(12,570)
Taxable Income – £37,430

Income Tax:
37,430 at 20% – £7,486

National Insurance:
Class 2 – 52 x 3.05 – £158.60
Class 4 – (50,000-9,569) x 9% – £3638.79
Total – £3797.39

In this case a sole trader would have (£50,000 – £7486 – £3797.39) £38,716.61 left after running their business and paying tax and NIC for the year.

Profit – £50,000
Less additional expenses – £(2823.79)
Net profit – £47,176.21
Less Personal Allowance – £12,570
Taxable Income – £34,606.21

Income Tax:
34,606.21 at 20% – £6,921.24

National Insurance (assuming rates stay the same):
Class 2 – 52 x 3.05 – £158.60
Class 4 – (50,000-9,569*) x 9% – £3638.79
Total – £3797.39

Health and social care levy (HSCL):
(50,000-9,569) x 1.25% – £505.39

Ignoring the HSCL for now we can see that the individual would now take home the amount of (£47,176.21 – £6,921.24 – £3797.39) £36,457.58.

After tax relief we can see then that the true cost of the budget measures to a sole trader is only £2259.03 and not the £2823.79 that the increased expenses actually cost the business. This is the difference between what they were left with after Income Tax and NICs between the two years – ignoring the HSCL as a tax rise on their own tax affairs...

Bear in mind that the new tax will also apply to their own income and not just their employers NIC contributions. Meaning that they'll pay an additional £505.39 in tax in 2022/23 – pretty much wiping out the tax relief available on the additional costs!

How ANNA can help

Make sure you fully categorise all of your expenditure and income when using the ANNA app. We have recently released a categorisation glossary to help you with this.

This will help you keep an eye on the costs and expenses of the business and also save you or your accountant’s time (and therefore money) at the end of the year – this then helps mitigate some of these costs.

You’ll also be pleased to know that we are developing a desktop app where you’ll be able to see all your categorised expenditure so you can categorise things faster and more efficiently.

Threshold for NIC is increasing in 2022/23 to £9,880 but have been kept the same as 2020 2021/22 in this example to illustrate the increased costs of the two measures.

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