National insurance increase means many could overpay for businesses if increased staff costs not considered.
On 7 September 2021, Prime Minister Boris Johnson announced that employers and employees’ national insurance (NI) contributions will each increase by 1.25 per cent from April 2022, with the increase becoming a separate health and social care levy from April 2023. Clearly, the employers’ NI increase will increase the cost of employment. This will reduce a target company’s future earnings (EBITDA), unless 100% of the cost of the increase can be passed on to the target’s customers through price increases. Buyers and investors must bear this in mind when considering how much they are prepared to invest. Sellers will also need to factor this into the quantification of employment costs in information memorandum financial data.
Fortunately, a rough and ready formula is available. If all employees earn a sufficient sum to exceed the earnings threshold, the cost to the target company and therefore the potential impact on EBITDA will be £125k for every £10m of gross salary cost.
In addition, many target companies will have employee equity reward plans that will mature as part of any transaction or employees who received their shares as a reward for past or future performance. The NI increase could create an additional cost to the target company of operating equity incentive rewards. This would be the case if an employee or director received shares and did not pay unrestricted market value for them, unless the shares were acquired under an enterprise management incentive plan or the employee had elected to bear the employer’s NI. This should be an area on which the buyer/investor seeks specific due diligence input, to ensure that all employer’s NI costs, including the April 2022 increase, are factored into completion accounts liabilities or other adjustments.
Will the joint elections that employers and employees have made under equity reward plans, which transfer the cost of employers NI to the employee, also apply to the 1.25% social and health care levy once it is carved out from NI as a separate levy/tax? The elections specifically relate to employers’ NI. Therefore the expectation would be that they would not, unless the government legislates to categorise the new levy as NI with a different branding. We would expect this to be a key consideration in due diligence exercises to make sure buyers/investors do not face an unexpected cash cost shortly after completion.
This is definitely an issue worthy of consideration for transactions in labour-intensive sectors!
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The NI increase and business investment
National insurance increase means many could overpay for businesses if increased staff costs not considered.
On 7 September 2021, Prime Minister Boris Johnson announced that employers and employees’ national insurance (NI) contributions will each increase by 1.25 per cent from April 2022, with the increase becoming a separate health and social care levy from April 2023. Clearly, the employers’ NI increase will increase the cost of employment. This will reduce a target company’s future earnings (EBITDA), unless 100% of the cost of the increase can be passed on to the target’s customers through price increases. Buyers and investors must bear this in mind when considering how much they are prepared to invest. Sellers will also need to factor this into the quantification of employment costs in information memorandum financial data.
Fortunately, a rough and ready formula is available. If all employees earn a sufficient sum to exceed the earnings threshold, the cost to the target company and therefore the potential impact on EBITDA will be £125k for every £10m of gross salary cost.
In addition, many target companies will have employee equity reward plans that will mature as part of any transaction or employees who received their shares as a reward for past or future performance. The NI increase could create an additional cost to the target company of operating equity incentive rewards. This would be the case if an employee or director received shares and did not pay unrestricted market value for them, unless the shares were acquired under an enterprise management incentive plan or the employee had elected to bear the employer’s NI. This should be an area on which the buyer/investor seeks specific due diligence input, to ensure that all employer’s NI costs, including the April 2022 increase, are factored into completion accounts liabilities or other adjustments.
Will the joint elections that employers and employees have made under equity reward plans, which transfer the cost of employers NI to the employee, also apply to the 1.25% social and health care levy once it is carved out from NI as a separate levy/tax? The elections specifically relate to employers’ NI. Therefore the expectation would be that they would not, unless the government legislates to categorise the new levy as NI with a different branding. We would expect this to be a key consideration in due diligence exercises to make sure buyers/investors do not face an unexpected cash cost shortly after completion.
This is definitely an issue worthy of consideration for transactions in labour-intensive sectors!
