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Preparing for the 2022 Tax Year: Wage Increases, National Insurance & Balancing Director's Pay Structures

We're just a couple of short weeks away from the start of the 2022/23-tax year, and there are a fair few changes to be mindful of if you're planning your payroll or cash flow for the months ahead.

SAS Accounting has collated a list of the enquiries we're receiving and wanted to address those key questions, centring on:

  • National Minimum Wage and National Living Wage rates.
  • Amendments to employer's statutory payments.
  • Pinpointing the ideal director's salary rate for this tax year.

With frozen income tax bands, living cost increases and inflation, it's highly advisable to get out in front of compulsory and discretionary pay rises now and ensure your workforce is aware of how their net income may change from April onwards.

National Minimum and Living Wage Rate Changes in 2022

National Minimum Wage (NMW) is the legal minimum you can pay a staff member.

National Living Wage (NLW) is also legally mandated and essentially means the same thing, applicable to employees of 23 and over (previously from 25 and above).

The new rates and the change from 2021 are below:

  • Apprentices (under 19 or over 19 and in year one): £4.81 - 11.9% increase from 2021-22.
  • Age 16 - 17: £4.81 - 4.1% increase from 2021-22.
  • Age 18 - 20: £6.83 - 4.1% increase from 2021-22.
  • Age 21 - 22: £9.18 - 9.8% increase from 2021-22.
  • Age 23 and above: £9.50 - 6.6% increase from 2021-22.

It's necessary to make sure that any workers on NLW or NMW know how much their pay will increase by, and also keep track of dates when they fall into the next bracket, such as:

  • Reaching the end of the first year of an apprenticeship.
  • Birthdays.
  • Pay reference periods.

That last factor indicates the period you pay your employees - for example that could be from 1st to the 31st of each month, or monthly on the 15th day.

If your employee is paid mid-month, the old NLW rates apply until 15th April, but you'll need to switch to the higher minimums for the first pay period beginning within the new tax year.

HMRC publishes a list of named companies that haven't paid the correct rates, and you must review your hourly wages to avoid a huge range of potential consequences.

Cost of Living Increases

Many employers are also asking whether they should offer a cost of living increase, many using the percentage increases in NLW as a benchmark for their calculations.

Others follow the Consumer Prices Index to assess the contrast between wage increases offered and the true cost of living, although much depends on the financial viability of linking wages to inflation.

While this isn't mandatory, it's worth considering from a staff retention and welfare perspective.

Please get in touch with SAS Accounting at any time if you'd like help reviewing your cash flow and salary rates to analyse the financial impacts.

Keeping Pace With Statutory Payment Rises

The next focus area is on statutory payments - amounts that businesses are obliged to pay employees or contribute on their behalf.

Family Statutory Pay

Family pay, including all parental leave, rises to £156.66 from £151.97 per week

Rates can be complex - maternity pay, for example, is paid at 90% of salary for the first six weeks and then drops onto either the statutory amount or the 90% average, whichever is lowest.

Sickness Absence

As of 6th April 2022, the general Statutory Sick Pay rate rises from £96.35 to £99.35.

However, a lot depends on how many qualifying days an employee works per week - this impacts the amount payable for each day of absence. 

You can use the Statutory Sick Pay Calculator to get a more accurate indication.

National Insurance Contributions

The Lower Earnings Limit (LEL) is the minimum income required to qualify for state benefits, including years counted towards the State Pension.

This limit rises from £120 to £123 a week this tax year, along with other National Insurance (NI) changes.

From April 2022, all NI payments will increase by 1.25% as part of a new levy to finance health and social care.

In 2023, the same 1.25% rate will apply, although it'll be renamed the Health and Social Care Levy and be shown on payslips as a separate tax deduction.

Employers must comply with these changes but are not obliged to make up the difference in net take home pay with a wage increase - although they may choose to do so.

Calculating Directors Salaries in 2022-23 for Tax Efficiency

Our final point to cover is the need to balance dividends and salaries for directors - a topic we've covered in previous years; you can find the guidance for last year HERE.

It's an important consideration because NI thresholds and tax bands mean that you need to draw a salary that qualifies for the State Pension whilst making full use of tax-free allowances and lower dividend tax rates.

The Personal Allowance from 2022-23 is frozen at £12,570, and you need to earn above the LEL (£6,396) and below the threshold at which you'll start paying NI contributions.

There is a slight complication that in the Spring Statement on 23rd March, the chancellor announced that the NI primary threshold was increasing to match the personal allowance - but not until July 2022.

We have therefore had to revise the optimal salary calculation slightly, because across the tax year the NI threshold is £11,908 (£9,880 until 30th June and £12,570 after that).

For sole directors, the optimal salary for 2022-23 is therefore now £11,908 a year, or £992 a month.

That's because:

  • The company won't pay Employer's NI, and you won't make NI contributions.
  • You earn over the LEL, so earn NI credits towards the State Pension.
  • The salary remains within the tax-free Personal Allowance.

If you would like advice about any of the information contained within this article, please contact the SAS team.

You can also read more detailed breakdowns of changes to tax rates and income tax brackets in our guide to Preparing for Employment Costs in 2022.

It's wise to prepare for the new tax year as soon as possible. Still, if you have identified any impacts on your payroll, forecasting or budget management, there is time to make adjustments as needed.