Potential National Insurance increase at Budget sparks backlash

A potential increase in employer National Insurance contributions (NICs) in the Autumn Budget has sparked a major backlash with claims that the move would break Labour’s manifesto commitments as well as hitting hiring and limiting pay rises at businesses. We take a look at the impact a hike in employer NICs might have.

Stick to our commitments

Both Prime Minister Keir Starmer and Chancellor Rachel Reeves have refused to rule out a rise in employer NICs in the Budget, as part of plans to plug the hole in the public finances left by the previous administration.

In a recent speech, Reeves said: ‘We will stick to the commitments we made in our manifesto. But you know there is a £22 billion black hole over and above anything we knew about going into the election that we need to fill, and that’s not just a one year, that persists throughout the forecast period.

‘So we are going to need to sort of close that gap between what government is spending and bringing in through tax receipts. But we are going to be a government that sticks to our manifesto commitments, including that one [on not raising taxes on working people].’

Straightforward breach

Unsurprisingly, opposition Conservative politicians, including the former Chancellor Jeremy Hunt, were quick to claim that increasing employer NICs would break the promises set out in Labour’s manifesto.

They found support from Paul Johnson, Director of the Institute for Fiscal Studies (IFS), who said: ‘It seems to me that would be a straightforward breach of a manifesto commitment. I went back and read the manifesto and it says very clearly, ‘We will not raise rates of national insurance.’ It doesn’t specify employee national insurance.’

Mr Johnson had previously warned during the election that the main parties’ tax-and-spend pledges represented a ‘conspiracy of silence’ on the true picture of the country’s finances.

According to the IFS, the chancellor has an estimated £25 billion black hole to fill in order to meet Labour’s spending commitments.

Business backlash

Perhaps more concerning for the Chancellor would be the backlash from the UK’s business groups who were unanimous in speaking out against the mooted increase.

Rain Newton-Smith, Chief Executive of the Confederation of British Industry, said that a rise in NICs would prove to be a ‘difficult move’ for employers, and would ‘increase the cost of taking someone on’ and make it ‘harder for businesses to create the jobs and the growth’ to fund public services.

Craig Beaumont, Executive Director at the Federation of Small Businesses, said it would ‘make every job in all our local communities more expensive to maintain’.

Kate Nicholls, Chief Executive of UKHospitality, warned that any rise in NICs would ‘particularly hammer sectors like hospitality, where staffing costs are the biggest business expense’.

Hobble growth

Meanwhile, Alex Veitch, Director of Policy at the British Chambers of Commerce (BCC), said: ‘The Chancellor is facing a tight fiscal position and will have to make difficult decisions in the forthcoming Budget. But raising employer NICs would place an additional strain on businesses.

‘Firms are run by working people, nearly all UK companies are small, with many family-owned, and they are the anchors in our local economies. Raising employer NICs, in an already stretched economy, will simply hobble growth and lead to businesses having less money to invest in their staff.

‘Our research shows that taxation is the top concern for business. Any taxes rises must be countered by steps to incentivise investment that smaller firms can access with minimal red tape. This could include a workable R&D Tax Credit scheme and retaining the current level of the Annual Investment Allowance.’

Honesty the best policy

However, Ms Reeves did receive support from her old boss at the Bank of England, the former Governor Mervyn King.

In an open letter published in The Independent newspaper, Lord King warned the Chancellor against higher borrowing.

He wrote: ‘Keep it simple and be ruthlessly honest with the public. Avoid slogans such as ‘borrowing for investment’. There is only one sensible definition of fiscal sustainability. It is that the structure of tax rates will generate sufficient revenue to allow the ratio of debt to national income to fall slowly but steadily in normal years.”

‘An honest approach would be to say that such a commitment now appears a mistake and to return NICs to their previous level. You might be surprised by how many citizens would accept such honesty; better to tackle the problem now and not a year or so before the next general election.’