Autumn Statement: How to process the mid-year NIC Class 1 reduction

Pressure on payroll teams to implement NIC changes

Another mid-year NIC change for payroll

In the Autumn Statement, the Chancellor announced a reduction to employee class 1 NIC (currently 12 percent) to 10 percent, with the change taking effect from January 2024. From a payroll operation perspective, this will put pressure on payroll teams as they enter their busiest period and prepare for year end. Most employers will have recent experience of introducing mid-year changes following the introduction and withdrawal of the Health and Social Care levy last year and will be well aware of the challenges that followed. This article summarises and reminds you of the challenges and key learnings from this exercise. 

Key challenges and learnings

We appreciate that the timing of the changes announced by the Chancellor are going to present various challenges to employers, not least of which, how the payroll software is to be reconfigured, tested and delivered into a live payroll environment, in this very short timeframe.  

We recommend early engagement with key stakeholders including your payroll team and software provider to develop a project plan and identify resource requirements. Timing is critical as the employee NIC change is effective for pay periods after 6 January 2024.

Employee communication is always a key factor in a successful change management process and this change in NIC rate falls within that. As an example, the first payslip issued to employees in January once the new rate has been calculated may trigger queries from employees given that media speculation indicates that net pay will increase by 2 percent. You may wish to consider publishing examples to illustrate the impact.

Timescales and resource need careful consideration as January is a particularly busy time for payroll teams who may have shut down over the Christmas period and need to process overtime claims and commissions following busy trading periods in December and January.

Weekly payrolls have an extremely tight turnaround and will require very careful planning to demonstrate a commitment to employees that you are supporting with the cost of living to ensure they receive the benefit of the reduced rate as quickly as possible.

National Insurance is calculated on a pay period basis so capturing information from the business about payroll adjustments should be robust to ensure payments are subject to NIC at the correct rate at the correct time; you may face pressure from employees to defer payments to take advantage of the lower rate so it will be important that your processes have integrity so you can support why payments are being subject to NIC in a particular pay period. This may be more challenging for sectors facing heavy demand and therefore significant payroll changes during this period, e.g. high overtime claims, payments to seasonal workers etc.

Rigorously test the changes to payroll by your provider to ensure the calculations are correct so that your payroll returns are compliant.

Other changes announced for the Class 1 NIC reduction include regulation that applies a blended rate of 11.5 percent to the Annual Earnings Period for Directors in relation to the 2023-24 tax year, where the earnings period is as specified in regulation 8(2) to (5) of the Social Security (Contributions) Regulations 2001.

We have a team of payroll consultants who bring a wealth of experience to the challenges of payroll software changes and mid-year implementation. If you would like to discuss any queries or concerns or resource gaps that you may have with these imminent changes, please don’t hesitate to reach out to the authors of this article, or your usual KPMG in the UK contact.