Client Newsletter

What you need to know about changes to payroll in 2022

Over 200 employers were named and shamed by the Government at the end of 2021 for failing to meet the National Minimum Wage (NMW).

The employers that have underpaid workers did so in the following ways:

  • 37 per cent – Deductions that reduce minimum wage pay, for example workers out of pocket to comply with the dress code
  • 29 per cent – Unpaid working time, such as mandatory training, trial shifts or travel time
  • 16 per cent – Failing to pay the correct rate to apprentices
  • 11 per cent – not increasing NMW pay in line with Government increases or paying the wrong minimum wage rate based on a person’s age.

From April, employers must be ready for a number of changes to the National Minimum Wage, National Insurance Contributions and Dividends when setting remuneration and managing their payroll.

National Minimum Wage Increase

HM Treasury revealed last year that the National Living Wage (NLW) will increase to £9.50 an hour as of 1 April.

Announced a few days before the Autumn Budget, the rate will increase by 59p per hour from the current rate of £8.91.

It has been estimated that this will mean that the lowest-paid workers will see their annual income rise by £1,000. Not only this but the National Minimum Wage (NMW) will raise too.

How much will pay increase for all ages?

  23 and over 21 to 22 18 to 20 Under 18 Apprentice
April 2021 (current rate) £8.91 £8.36 £6.56 £4.62 £4.30  
April 2022 £9.50 £9.18 £6.83 £4.81 £4.81  

 National Insurance Increase

The Government announced a 1.25 percentage point increase to National Insurance contributions (NICs) from April, which will affect employees, employers and the majority of self-employed workers.

Despite pledges to not raise NICs during the current Parliament, the decision has been taken to bolster the nation’s health and social care budgets in response to the pandemic.

The move will help to raise more than £12 billion for the NHS and social care system but it will mean that many individuals and businesses face greater employment costs.

The increase in NICs will initially affect everyone over the age of 16, but below state pension age, earning more than £184 per week through employment or with profits of £9,568 or more a year in self-employment.

The 1.25 percentage point increase also applies to employer NICs, minus any reliefs that a business may be entitled to.

From 2023, the Health and Social Care Levy will formalise the new rules and will require individuals working above State Pension age to contribute as well. Currently, this group are not required to pay any NICs.

For a typical basic rate taxpayer earning the current UK median income for this group of £24,100, they will have to pay an additional £180 a year, while for those earning the median higher rate income of £67,100, they would have to pay an additional £715.

The increase will not apply to Class 2 NICs, which is the flat rate paid by the self-employed with profits above the Small Profits Threshold (currently £6,515 per year) or Class 3 NICs, made up of voluntary contributions from taxpayers to fill in gaps in their contributions’ records to qualify for benefits.

Dividend Tax Rate

Most businesses owners tend to be paid via a regular salary, as well as dividends. This is an amount paid out regularly from a company’s profits to shareholders.

Getting this balance right can sometimes be the difference between paying tax at the basic, higher and additional rate, as well as affecting other personal tax reliefs and National Insurance contributions.

If you operate a business, you can use the tax-free dividend allowance of £2,000. Any dividends over this amount will currently be taxed at different amounts depending on your marginal rate as follows:

  • Basic-rate taxpayers pay 7.5 per cent on dividends.
  • Higher-rate taxpayers pay 32.5 per cent on dividends.
  • Additional-rate taxpayers pay 38.1 per cent on dividends.

You should be aware that from April these rates will increase by 1.25 percentage points. The new rates from this date are as follows:

  • Basic rate – pay 8.75 per cent
  • Higher rate – 33.75 per cent
  • Additional rate – 39.35 per cent

If you manage the pay of directors within your payroll, you may need to consider the change in rates when setting remuneration.

Nevertheless, by carefully balancing the amount of salary you pay and the dividends you receive you can still reduce the amount of tax dividend recipients pay.

Time to outsource your payroll?

If you manage a payroll you need to ensure that all workers are paid and taxed correctly.

Employers often make common mistakes when it comes to payroll, such as forgetting to change the wage rate as an employee gets old or making incorrect reductions for clothing and equipment that is necessary for an employee’s role.

Not only that, but the regular payroll process can be complex and time-consuming, especially with the regular change to legislation.

That is why many employers choose to outsource this function to experts, such as out team at TWP.

We support a wide range of sectors with their payroll processing and can help ensure you remain compliant, while saving time and reducing the strain.

To reduce your chances of being penalised, named and shamed, please contact us.