Understanding the new NIC changes – A guide for payroll departments

The Autumn Statement has brought significant changes to National Insurance Contributions (NICs) that will impact both employees and the self-employed.

Class 1 employee NICs reduction

Effective from 6 January 2024, the main rate of Class 1 employee NICs will see a reduction from 12 per cent to 10 per cent. Payroll departments must adjust their systems to reflect this reduced rate, ensuring accurate calculations and deductions in employee payrolls.

Class 4 self-employed NICs cut

For the self-employed, the main rate of Class 4 NICs will decrease from 9 per cent to 8 per cent, starting from 6 April 2024.

This reduction will affect self-employed individuals with profits above the lower profit limit. Payroll systems that handle payments for self-employed contractors need updating to accommodate this change.

Class 2 self-employed NICs update

A major update comes in the form of Class 2 NICs for the self-employed. From 6 April 2024, those with profits above £12,570 will no longer need to pay Class 2 NICs. However, they will continue to have access to contributory benefits, including the State Pension.

For those with profits between £6,725 and £12,570, they will still have access to these benefits through a National Insurance credit, without the need to pay NICs, as is currently the case.

Individuals with profits under £6,725 and others who voluntarily pay Class 2 NICs for access to contributory benefits can continue to do so.

The Government plans to provide further details on Class 2 reform next year, which will likely bring additional changes.

Action steps for payroll departments

To ensure a smooth transition, it’s essential for payroll departments to begin preparations now. This involves:

  • Working with software providers
  • Updating internal systems
  • Communication with employees and contractors

Keep an eye out for further updates from the Government, especially regarding Class 2 NICs reform.

HM Revenue & Customs’ (HMRC’s) Basic PAYE Tools product will be updated to reflect the change in Class 1 employee NICs. It’s advisable to monitor these updates and ensure your systems match up.

For any assistance with these changes, or for advice on payroll in general, please contact our expert team today.