The Daily Observer London Desk: Reporter- Victoria Smith
Keir Starmer has twice refused to rule out an increase in employer National Insurance contributions in the Budget – stating he had committed to not raising taxes on working people.
However, experts have warned an Autumn Budget rise in the employer national insurance rate or putting NI on pension contributions could have a knock-on impact for employees.
It would not directly be a tax rise on working people, meeting Labour’s pledge at the election, but could reduce hiring, wages and pension contributions.
We look employee and employer national insurance contributions and why the Government is considering hiking NI on the latter, or adding it to pensions, and what it might mean for you.
The Prime Minister twice refused to rule out changes to employer NI contributions
Why increase employer national insurance?
Speculation has been whirling over whether the Government will either increase the rate of employer national insurance contributions (NICs), or adding it on to employer pension contributions.
There are two rates of national insurance, one paid by employees on their qualifying earnings, and one paid by employers on the wages they pay.
Employee NI was cut twice by former Chancellor Jeremy Hunt and the standard rate currently stands at 8 per cent. The rate drops to 2 per cent on annual earnings above £50,284 – broadly in line with the 40p income tax threshold.
Employers also pay national insurance based on a worker’s wages and the rate for this currently stands at 13.8 per cent.
Labour promised ahead of the election not to raise taxes on working people and its manifesto ruled out increases in the rates of income tax, national insurance, VAT, and corporation tax.
But there are rumours that Labour believes it has some wriggle room on that promise and thinks it could claim to still be sticking to it, while raising employer national insurance and potentially levying it on employer pension contributions.
Over the weekend, business secretary Jonathan Reynolds suggested that the Chancellor could increase the levy on employers, which could raise as much as £17billion a year.
This would go some way to helping Chancellor Rahcel Reeves plug the £22billion so-called ‘black hole’ in the nation’s finances.
However, an NI increase for employers has been dubbed a ‘tax on jobs’ and could have a detrimental impact on business confidence, at the same time the Government is trying to make the UK an attractive place to invest.
It would add further labour costs to businesses already struggling with an imminent rise in the national living wage, as well as other cost constraints.
The possibility of hiking NI contributions has also come under fire from businesses and economists for breaking a manifesto pledge.
Paul Johnson, the director of the Institute for Fiscal Studies, said: ‘I went back and read the manifesto and it says very clearly, we will not raise rates of National Insurance.’
What would an employer NI hike mean for workers?
Any changes made to employer contributions will almost certainly trickle down to employees.
A survey by the Association of British Insurers and the Reward and Employee Benefits Association found that 42 per cent of companies that currently pay pension contributions above the auto-enrolment minimum would lower them if an NI levy was introduced.
Robert Salter, tax partner at Blick Rothenberg, told This Is Money: ‘A core principle of labour economics is that in effect it is workers that really cover the cost of employer NICs, as future pay rises and bonuses will be reduced to recognise the additional cost which the employer now has to cover.’
Employers might also look to alternatives to cut costs by either investing in technology to reduce labour, or offshoring some of the work to other countries.
‘Both of these developments can easily reduce the need for labour in the UK and the wages which people can expect,’ said Salter.
Phil Harwood, pension consultancy director at Evelyn Partners, told This Is Money there is a ‘general pessimism about pension provision’ among businesses.
‘The effects might initially be quite subtle and hard to detect. Some of our client businesses were going to increase their employer contribution percentage recently and/or improving the definition of pensionable earnings.
‘But they are now holding off from making these decisions until the Budget, and should employers’ NI be applied to pensions many of these companies will row back on these intentions. And firms could offer less generous terms to new employees.’
Hit: Any changes to employer NI contributions are likely to trickle down to employees
Could other work benefits be cut?
Changes made to employer pension contributions could also have an impact on how non-pension benefits, like healthcare, could be treated.
Harwood warns that the additional cost of pensions for businesses could hinder the trend towards offering generous perks.
What about salary sacrifice?
There has also been speculation that employer’s NI could be applied to salary sacrifice, which is often used by employees looking to boost their pension contribution.
‘This is used by about half of the businesses we advise to pay some or all of the employer’s NI saving to staff as an additional employer pension contribution,’ says Harwood.
‘Many employees could lose out on the 13.8 per cent uplift they currently get to their personal contributions.’
Jon Greer, head of retirement policy at Quilter said that any changes could make the arrangements far less attractive to employees, ‘potentially leading to a reduction in their use’.
‘However, they would still have a value where the employee’s NI savings are added to their pension, and would be even more valuable when sacrificing earnings below the upper earnings limit of £50,270 .
‘Where an employer currently shares all their NI saving with the employee through increased contributions, the impact on the employer is neutral; instead of the NI saving going into the employee’s pension, it would be paid to the Treasury.
‘The employee would still benefit from not paying employee national insurance but they would lose out on any NI saving the employer would have previously made to their pension pot.’
How will hiking employers NICs affect the economy?
Rachel Reeves is facing a conundrum as she looks to both balance the books and boost the economy, meaning she faces some hard decisions.
Earlier this week, the Government hosted an international investment summit in a bid to secure overseas funding, but could potential changes to employer NICs scupper these plans?
Salter warns that increasing costs for employers could potentially drive up inflation, which many people would argue is an indirect tax on everyone as their money buys them less and less.
There is also a risk that raising taxes on businesses could only deter international firms from investing in the UK.
‘Given that the Labour Government is – at least officially – focussed on growing the UK economy, I cannot see how they could validly increase employer NICs and pretend that this is still their real aim.’
Domestically, it could act as a further disincentive for employers to recruit new workers, particularly younger employees where firms ‘typically already have a significant training cost’.
That said, hiking NICs could ‘act as a way of increasing economic productivity… by reducing low cost employee numbers and replacing them with technology,’ says Salter.
While per head productivity might improve, it will be of little value to employees forced out of jobs and likely have to seek jobs elsewhere, or turn to benefits.
