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United Kingdom | Social Security | Modified national insurance – reconciliation for the 2022/23 tax year

United Kingdom | Social Security | Modified national insurance – reconciliation for the 2022/23 tax year

January 23, 2024

Social Security

United Kingdom: Modified national insurance – reconciliation for the 2022/23 tax year

Summary
UK National Insurance Contributions (NICs) rates and thresholds are normally only changed annually, with effect from 6 April this year. The 2022/23 UK tax year is therefore very unusual as the rates or thresholds changed three times, as a result of various changes in UK government and fiscal policy. As a result, annual NIC calculations are more complex for 2022/23 than in prior years.

Companies which have modified NIC schemes agreed with HMRC file a NIC Settlement Return (NSR) with HMRC each year, and the above changes will make the 2022/23 NSR more complex. This is due to the fact that some employees, having a full year liability to NICs require, in effect, three separate calculations compared to a single one in regular years. This not only results in more administrative tasks to be completed, but also generates additional costs related to an increased scope for the NSR calculations and preparation of the returns.

Vialto Partners have decided not to pass on these additional costs to our clients upfront and managed to agree with HMRC that a single, blended rate can instead be used for these calculations, under certain circumstances. This is welcome news for companies who have modified NIC schemes in place, as it means only one calculation per employee could be opted for in relation to the 2022/23 Modified NIC reconciliation, resulting in a more straightforward compliance process and lower associated costs.

In detail

What is the issue?
The rates applicable for NICs and the threshold at which employees, employers, and self- employed, start to pay UK social security (National Insurance) – referred to as the Primary Threshold (“PT”) – have been changed three times since April 2022. Therefore, the 2022/23 tax year has been an exceptional one from a National Insurance perspective because it has been effectively split into three different periods for the purposes of calculating contributions, as follows:

6 April 2022 to 5 July 2022 – at the start of the new tax year, the NIC rate for both employees and employers increased by 1.25% each, as a surcharge for health and social care purposes.
6 July 2022 to 5 November 2022 – the NIC primary threshold, which is the level of earnings at which you have to start making contributions, became the same amount as the income tax threshold – i.e., an increase from £9,880 (which came into force in April 2022) to £12,570.
6 November 2022 to 5 April 2023 – the surcharge introduced in April was reversed for the rest of the financial year and NIC rates for both employees and employers therefore fell by 1.25%.

In the UK, HMRC recognise the challenges for employers to report payments delivered overseas (such as assignment allowances, foreign taxes on behalf of employees under equalisation policies, remuneration delivered via an overseas payroll) on a real time basis for NIC purposes and offer concessions and a mechanism to reconcile NIC at a later stage via the EP Appendix 7A and 7B Modified NIC schemes. The Modified NIC scheme is a formal agreement that employers with employees seconded to or from the UK for a limited duration can conclude with HMRC, which allows them to calculate and pay the monthly NICs for these employees on a best estimate basis, provided the scheme is agreed with HMRC in advance and that the employees are eligible for inclusion in the scheme. The accurate NIC amounts are then reconciled on an annual basis via an NSR which is filed with HMRC by 31 March following the end of each UK tax year. As noted above, the NSR calculations are complicated for 2022/23 by the multiple changes in rates and thresholds during the year.

What is the solution?
As a response to the GSS Vialto Partners Team’s proposal, HMRC agreed that a blended rate can be used (when the specific circumstances described below apply), thus simplifying the calculations and bringing the 2022/23 tax year in line with the previous (and future) years in terms of the process to be followed when conducting the Modified NIC reconciliations.

HMRC agreed for a blended rate of NIC to be allowed for those individuals who are liable to NIC for the full 2022/23 UK tax year and are eligible for inclusion on the NSR, in line with Modified NI eligibility rules as included in Appendix 7A. As this therefore only covers UK inbounds, we are liaising with HMRC to see if the agreement can be extended to cover UK outbounds and split year individuals.

What next?
Although the blended rate will make the NIC calculations for most employees simpler and is therefore likely to be a good option for many employers, it is important for each company to consider whether to use the blended rate or actual NIC rates for their 2022/23 NSR calculations. Some examples of when using blended rates may not be appropriate include the following:

If the best estimated monthly NIC calculations have been particularly accurate, the use of the blended rate may create a NIC balance (resulting in either a refund or liability) on the NSR which would not otherwise arise if accurate rates have already been used.
For employees in receipt of large, one-off payments, the blended rates may result in a significant NIC liability arising. For example, bonuses paid in March 2023 would have had employee NIC withheld at 2%, whereas the blended rate of NICs will be higher than this and so may produce a liability overall and thus artificially increase the balance due to HMRC as part of the Modified NIC reconciliations.

The takeaway
Given the tax year 2022/23 ended 7 months ago and there are approximately 5 months left to finalise and submit the NSRs for this tax year, HMRC’s agreement to use a blended rate is welcome news as it simplifies the 2022/23 NSRs and so reduces costs. However, it is important to carefully consider on a case-by-case basis whether it is appropriate to use the blended rates.

Contact us
Please feel free to reach out your local social security contact at Vialto Partners or to the Vialto Partners Social Security Leadership team:

Martin Muhleder
Global Social Security Partner

Gary Chandler
UK/Ireland Social Security Director

Andrei Ioanei
Global Social Security, Senior Manager

Leanne Birch
Global Social Security, Senior Manager

Further information on Vialto Partners can be found on our website: www.vialtopartners.com

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Vialto Partners (“Vialto”) refers to wholly owned subsidiaries of CD&R Galaxy UK OpCo Limited as well as the other members of the Vialto Partners global network. The information contained in this document is for general guidance on matters of interest only. Vialto is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. In no event will Vialto, its related entities, or the agents or employees thereof be liable to you or anyone else for any decision made or action taken in reliance on the information in this document or for any consequential, special or similar damages, even if advised of the possibility of such damages.

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