HM Revenue & Customs (HMRC) is warning businesses to get their payroll software systems urgently updated to reflect the government’s decision to roll back the 1.25% uplift in National Insurance rates introduced in April 2022.

The change, announced on Thursday 23 September 2022 and due to come into effect on 6 November 2022, will see National Insurance (NI) rates cut by 1.25% for employees, employers and the self-employed, several months after the previous government introduced the higher rate.

In a communication to businesses, HMRC warned that news of this unexpected “in-year” tax cut would need to be acted on quickly to ensure company payroll systems are updated in time for the November pay cycle and ensure employees do not end up making higher than necessary NI contributions.

“We realise the timeline for this is tight and some employers may not be able to implement the changes in time. HMRC will be directing employees to their employers to correct any overpaid NICs (National Insurance Contributions) in the first instance,” the communication stated.

The tax collection agency also moved to assure companies that use its free HMRC Basic PAYE tools to manage their payroll that this software will be automatically updated to reflect the change, before urging users of alternative payroll systems to ensure their providers are aware of what is happening.

“We have also written to payroll software developers to make them aware of these changes and asked them to take the relevant actions. You should, therefore, contact your software development initially with any queries,” the communication added.  

The government’s announced cut to National Insurance rates was made public ahead of the chancellor of the exchequer, Kwasi Kwarteng, delivering his first fiscal statement – dubbed the mini-budget – on Friday 23 September 2022.

As previously reported by Computer Weekly, various stakeholders from across the contractor community had expressed their hope in the lead-up to the event that a cut in National Insurance rates would be forthcoming.

The Association of Independent Professionals and the Self-Employed (IPSE) has been fiercely opposed to the National Insurance hike ever since it was first mooted, and its director of policy, Andy Chamberlain, complemented the new chancellor on his “sensible decision” to axe it.

“Ever since this measure was announced by the former Prime Minister, we’ve been calling for it to be scrapped,” he said. “The increase to National Insurance will have affected anyone who works, but those who work via an umbrella company – often against their wishes – have been doubly impacted, because they are unfairly forced to shoulder the burden of not just employee NI, but employer NI too.”

He added: “We are delighted that the chancellor has taken the sensible decision to reverse this unfair tax rise.”

Matt Fryer, managing director of umbrella company Brookson Group, agreed the change would be warmly welcomed by umbrella company contractors, who will see an uptick in their take-home pay as a result – provided their chosen supplier passes on the benefit to them.

“This is a double whammy benefit for umbrella employees, who will see take-home pay increase due to both the reduction in employees NIC and the employer paying less in employers NIC. Umbrella employees should ensure that their umbrella employer passes on all of the NIC savings on to them,” he said.

“It will, however, result in an unexpected administrative burden for umbrella providers and accountants, who will need to amend their systems mid-tax year and communicate with impacted employees and customers.”