Expected national insurance hike to cost businesses £3.5bn

Economists and business lobbyists warn that increasing national insurance will hurt employment and lower wages

UPDATED: The government’s expected 1.2 per cent hike in national insurance will cost businesses up to £3.5bn to match employee contributions, economists have warned.

The Institute for Fiscal Studies estimates that if £10bn of additional revenue is generated by the NI tax increase, businesses will need to find between £3bn and £3.5bn extra from April.

The self-employed will also face the NI rise, though they already make lower contributions.

>See also: Small business owners face increased national insurance contributions

Professor Len Shackleton, research fellow at the Institute of Economic Affairs, described employer national insurance as a “crude payroll tax” which discourages lower-paid employment and is then passed onto workers in the form of lower pay.

Craig Beaumont of the Federation of Small Businesses told the Daily Telegraph: “Hiking the jobs tax on employees and employers would make it more expensive for businesses to create and maintain jobs.”

Mike Cherry, chairman of the FSB, told the newspaper: “This regressive levy is yet another outgoing for small businesses and sole traders to worry about against a backdrop of spiralling input prices, supply chain disruption, a deepening late payment crisis, rent arrears, rates bills returning, skills shortages and emergency loan repayments.”

>See also: Taxman could claw back up to 10% of furlough cash

Helen Miller, deputy director of the Institute for Fiscal Studies, added that worker’s wages could ultimately go down when employers pass on extra costs.

Miller said: “Over time, the fact that employers have to pay higher employer NICs means they won’t be able to offer as much in terms of wage increases. Therefore, eventually it will be employees who are bearing the cost of employer NICs.”

Proposed National Insurance social care tax rise

NIC at current rates1% increase1.25% increase
£20,000 income£1,252£1,356£1,382
£40,000 income£3,652£3,956£4,032
£60,000 income£5,079£5,583£5,709
Source: Blick Rothenberg

An announcement on the Government’s thinking is expected today (Tuesday) with prime minister Boris Johnson, chancellor Rishi Sunak and health secretary Sajid Javid having agreed to raise national insurance by about 1.25 per cent.

Tory MPs are worried that raising national insurance will put the burden for elderly care on the young and those of working age. When you hit state pension age, you stop paying national insurance, even if you keep working.

Boris Johnson’s former chief of staff-turned-nemesis Dominic Cummings said: “Why should young people on average and below-average incomes lose disposable income to pay for another subsidy for the older middle classes? This is bad policy and bad politics.”

However, MHA partner Patrick King says criticism of the government’s proposal on the grounds of fairness is overblown. He says the suggestion that a NI rise to pay for social care represents the wealthy being subsidised by the less well-off is “a little unfair”, as the main beneficiaries of the scheme will be those on lower incomes.

Also, as Labour MP Barbara Keeley, a member of the health select committee, pointed out, half of local authority social care budgets are spent on disabled people of working age.

Despite howls of outrage from Conservative backbenchers over the Government breaking an election manifesto promise not to raise NI, Johnson is banking on public support. Two thirds of the public said they would support national insurance going up from 12 per cent to 13 per cent for the NHS and social care, YouGov found.

Increasing national insurance would be more popular than putting up income tax, the poll suggested.

Only fifty-one per cent backed a 1p increase in income tax for increased health spending.

Further reading

Nearly 300,000 sole traders face increased tax bills

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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...

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