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UK businesses warn national insurance hike will hit hiring

Britain's Prime Minister Boris Johnson leaves from 10 Downing Street. Photo: Getty Images
Britain's prime minister Boris Johnson. Photo: Getty

Businesses have slammed the government for its plans to raise national insurance (NI) contributions in an attempt to fund a £7bn ($9.5bn) shortfall in social care funding that has come about as a result of the pandemic. They have said it will impact hiring and slow down the economic recovery process.

Speaking in parliament, prime minister Boris Johnson said the government will raise national insurance by 1.25%. He also said that dividend rates are to increase by the same amount.

This is set to raise about £12bn ($16.6bn) per year, or £36bn over three years, and would break a Conservative manifesto pledge not to increase national insurance contributions, income tax or value added tax.

Employee national insurance rates have been unchanged at 12% since 2011. The move would mean that someone earning £30,000 a year would pay about £250 extra in tax.

It is the biggest UK tax increase for 28 years.

Read more: UK National Insurance hike: What it means for your finances

“This is an extraordinary time to be adding additional burden to business and the cost of employing staff, just as it looks to recover from the pandemic," said Kitty Ussher, the Institute of Directors’ chief economist.

"It smacks of political opportunism, exploiting public sentiment at the expense of some of the most productive and entrepreneurial segments of the economy.”

The institute's research shows that 73% of businesses are already concerned about rising salary-related business costs.

She said the tax was established to protect people financially from the risks of being unable to work based on a contributory system, and it is on that basis that employers also make contributions.

“There is no logic to employer national insurance contributions being used to fund anything else.”

Read more: FTSE falls as UK increases NI and dividends rate

Meanwhile Suren Thiru, head of economics at the British Chambers of Commerce, also said businesses strongly oppose the move.

She said it will "be a drag anchor on jobs growth at an absolutely crucial time" when firms are hammered by 18 months of COVID related restrictions and have built up huge debt burdens.

“This rise will impact the wider economic recovery by landing significant costs on firms when they are already facing a raft of new cost pressures and dampen the entrepreneurial spirit need to drive the recovery," said Thiru.

She said the focus instead should be on "creating the best possible environment for businesses to grow and thrive so they can sustainably deliver the tax revenue needed to support our public services and the wider economy.”

“Few have been hit harder by COVID-19 than the self-employed. With over six million small businesses in the UK — contributing trillions of pounds a year in turnover — it is crucial to our collective recovery that they bounce back," said Alan Thomas, UK CEO at provider of small business insurance Simply Business.

“The national insurance rise is the latest in a long line of setbacks, as self-employed people look to revive their livelihoods."

Vaccines minister Nadhim Zahawi has it would be "arrogant" to suggest that the social care funding problems can definitely be fixed.

Read more: Johnson announces £12bn tax increase to fund NHS and social care

He added that while Johnson is "serious about fixing the problem," the issue "will increase before it gets better."

Johnson also included shareholder profits in the levy where the most profitable market speculators would be targeted.

Paying national insurance allows Brits to qualify for certain benefits and the state pension. NI is a major source of revenue for the Treasury, bringing in more than £150bn in 2021/22 and accounting for one in five pounds raised in taxation.

Almost everyone who works in the UK must pay mandatory national insurance.

National insurance is a tougher tax for lower earners than income tax because NI kicks in at £9,568, while income tax only begins for earnings above £12,570.

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