National insurance: Is tax going up and what does Rachel Reeve’s proposed hike mean?
Labour came under criticism in recent days after several ministers refused to rule out that an increase in employer national insurance contributions (NICs) will be announced in the upcoming budget.
Rachel Reeves is set to deliver the party’s first fiscal event in 15 years on 30 October. She has said it will involve “tough decisions”, after previously saying there is a £22 billion “black hole” in the UK’s public finances left by the former government.
Speculation has mounted in the subsequent months, with an increase in employer NICs now looking likely. The measure has caused strong political debate, focused on whether it would break Labour’s manifesto pledge to not raise taxes on “working people.”
Ministers and Treasury officials have indicated the government’s position is that the measure would not break their manifesto pledge. Meanwhile, Institute for Fiscal Studies director Paul Johnson has argued it would be a “straightforward breach.”
Here are the facts about the debate and how the measure could affect you:
What are employer NICs?
Employers pay NICs on all earnings above £175 a week at 13.8 per cent. This is a flat rate, meaning it does not increase or decrease after certain earnings thresholds. It is deducted and set aside for HMRC before wages are paid out.
This means that, for someone earning £20,000 this year, their employer would pay £1,504 in NICs. This increases to £4,264 for an employee earning £40,000, to £7,024 for £60,000 and so on.
This is paid on top of earnings and is completely separate from employees’ NIC contributions which are automatically deducted from their wages.
Small employers can claim an ‘employment allowance’ which gives them a deduction on NIC contributions below £5,000, provided the NIC they paid or still owe for the previous year was below £100,000.
Importantly, employees should not be made to pay towards their employer’s NICs. Employers are legally obliged to pay for this out of their own funds, so in this sense, it is a direct tax on business, not individual incomes.
What Labour says
Labour has not confirmed that an employer NIC hike will be included in the Budget, but has refused to rule the measure out. Both the prime minister and chancellor have dodged questions on the potential tax rise, pointing to Labour’s pledge not to raise taxes on “working people.”
Responding to reports, a spokesperson for the prime minister said: “When it comes to taxes, I’d have nothing to add beyond what is in the manifesto, which is clear that we will ensure taxes on working people are kept as low as possible, and that we will not increase taxes on working people, which is why we will not increase national insurance, income tax or VAT.”
This has led some to conclude that Labour will look to pass off a hike on employer contributions as a tax on business, not employees. While perhaps technically true, some experts have said this is a semantic trick which does not reflect reality.
What critics say
While employer NICs are not meant to be passed on to employees directly, experts point out they often are indirectly as businesses look to offset the expense.
Stuart Adam, senior economist at the IFS said: “Employer National Insurance contributions (NICs) are a tax on the earnings of working people.
“In the long run, we would expect the majority of a rise in employer NICs to be passed on to workers in the form of lower wages, which would in turn mean lower income tax and employee NICs liabilities.”
The tax expert adds that in the extreme case that an increase of one pence per pound in employer NICs was passed on to employees in the form of lower wages, the measure would only net £4.5 billion a year. He adds that the end figure would probably be a little higher than this, but much less than a previous HMRC estimate of £8.5 billion.
How have businesses reacted?
Experts have cautioned that any increase in national insurance would mean higher costs for businesses, which could impact their staff and customers.
Rob Morgan, chief investment analyst at wealth manager Charles Stanley, said: “Employers consider the total cost of an employee, which includes employer NI contributions and pension contributions.
“If these were to increase it could lead to businesses restricting new hires, limiting pay rises or scaling back pension payments.
“Yet some may instead look to pass these costs on in terms of higher prices.”
Kate Nicholls, the chief executive of trade group UKHospitality, warned that an increase could be a “tax on jobs”, adding: “An increase would particularly hammer sectors like hospitality, where staffing costs are the biggest business expense.”