How much national insurance hike will cost your business

The Government's £11bn national insurance tax grab to pay for social care will hurt economic recovery and create unemployment, warn small businesses and economists

UPDATED: Businesses have criticised government for a national insurance hike of 1.25 per cent each for both employers and staff – a combined 3 per cent rise – as firms are only just recovering from the pandemic.

Economists have warned the £11bn national insurance contribution (NIC) hike will create unemployment and stifle future job creation.

The new health and social care levy will generate in total £14bn a year, which falls to a net £12bn of income as some will be paid by public sector workers. About £11bn will come from NICs and £600m from increasing tax on dividends.

The Federation of Small Businesses has warned that more than 50,000 jobs in UK small businesses are at risk from the national insurance hike, which will cost British SMEs about £5.7bn.

Mike Cherry, chairman of the FSB, said: “Business owners who have done all they can to retain and support their staff during the pandemic are now being punished for that loyalty with an £11bn increase in NICs, which essentially serve as a jobs tax.”

Andrew Goodacre, chief executive of the British Independent Retailers Association, said: “Of all the options available to the Government, it is disappointing that increases in national insurance have been chosen because of the impact on lower paid workers and small businesses … despite all the positive economic data, this recovery is still very fragile”.

Paul Dales, chief UK economist at Capital Economics said that there could be 130,000 fewer people employed in a year or two if the rise in national insurance contributions reduces GDP and the increased spending on the NHS and social care does nothing to offset it.

The Centre for Economics and Business Research has estimated that if a quarter of small business do not hire one extra employee because of increased national insurance, it would cost 350,000 jobs.

How much the national insurance hike will cost your small business

The planned 1.25 per cent increase on both employeer and employee NICs from next year will lift the tax on employment from 22.7 per cent to 24.6 per cent and will widen the gap with the self-employed, whose own NIC rate will increase from 9 per cent to 10.25 per cent.

About two-fifths of all NICs are paid by employers, with the rest borne by staff.

And self-employed company directors, many of whom missed out on Covid-19 financial support, also will be hit by a 1.25 per cent increase in tax on how they pay themselves on dividends.

Cherry added: “The Government often celebrates the existence of 6m small businesses in the UK — the majority of which are sole traders, a group which will be hit especially hard by the NIC’s rise.”

Commenting on the Government bringing in self-employed dividends within the scope of the national insurance hike, Institute of Directors chief economist Kitty Ussher told The Times: “The tax on dividends will yet again target directors of small companies. Incorporated sole traders and other owner-managers were the only group that were not supported by the Government during the pandemic.”

The rate on employer contributions paid by small businesses will rise to 15.05 per cent, up from 13.8 per cent.

However, prime minister Boris Johnson said that 40 per cent of businesses would not pay the new levy because of the employment allowance, which waives the first £4,000 of employer NICs for businesses with less than £100,000 of total NICs liabilities.

For employees, the rates on “class one” contributions which employees pay on earnings in excess £9,568 a year will rise from 12 per cent to 13.25 per cent, while the “upper earnings rate” – which kicks in on earnings of more than £50,270 a year – will increase from 2 per cent to 3.25 per cent.

This means that an employee earning £20,000 will be forced to hand over £130 a year more, while those on salaries of £40,000 and £60,000 will pay an extra £380 and £630 respectively, according to tax firm Blick Rothenberg.

National insurance hike for self-employed

The self-employed pay slightly lower rates “class four” contributions. The rate they pay will rise to from 9 per cent to 10.25 per cent on annual earnings of more than £9,568 and up from 2 per cent to 3.25 per cent on anything more than £50,270.

Some lower-earning freelancers pay “class two” national insurance at a rate of £3.05 a week on annual earnings from £6,515 up to the class four £9,568 threshold. The national insurance hike will not apply to “class two” contributions.

Employees and employers can reduce the amount they amount of national insurance they pay via salary sacrifice schemes, where workers pay for workplace benefits such as season ticket loans or to pay for bicycles, or by upping how much they pay into workplace pension schemes.

Further reading

Expected national insurance hike to cost businesses £3.5bn

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