Britons to pay the price as SMEs absorb tax rise

Businesses are bracing for a hike in the Government’s employer National Insurance contributions (NICs) but who will pay for it?

A survey of business owners from iwoca — one of Europe’s largest SME lenders – suggests that it will be employees and customers who will feel the hit.

The research warns that over 300,000 SMEs – a fifth nationwide – may cut jobs due to the rising NICs. This reinforces months of stark predictions that firms already facing high overheads will have no choice but to cut staff.

Businesses prepping

SMEs are waiting for the Chancellor’s Spring Forecast with bated breath but iwoca’s results suggests that, when it comes to NICs, they are fully expecting a tough time.

From April, Class 1 contribution rates are set to increase from 13.8% to 15.0%. The government is also planning on lowering the secondary threshold (ST). For businesses, this means they must start paying NICs from £5,000 of an employee’s earnings, instead of at £9,000.

Two-thirds (66%) of SME leaders estimate the higher NICs rate will cost them each over £10,000. As a result, more than a third (35%) of SMEs say that they will slow hiring plans. In addition, 31% expect to have to reduce pay rises, while over a quarter (27%) will have to delay promotions.

The data confirms that a third (33%) of SME leaders would invest more in their businesses if they weren’t facing a NICs hike. This gives credence to dire predictions that the rise in NICs will stall startup growth.

In an open letter, hospitality businesses issued a warning: “Without action, many businesses will be forced to reconsider their growth plans, and many smaller venues may be at risk of closure, risking future job creation in communities up and down the country,” they wrote. Likely this is the case across all industries.

Impact on customers

The research also revealed that having to foot the NICs bill will hit customers hard.

Respondents admitted that any planned price lowering on products will have to be shelved. In fact, nearly 60% of respondents said that they are planning to increase prices for customers to cover this higher NICs burden.

However, with customers feeling the pinch, businesses need to deploy a well-thought out pricing strategy. If price hikes are inevitable, they might, for example, need to reframe what they offer. There are many approaches – including price skimming and freemium models.

Ideally, this strategy needs to be treated as one of the biggest decisions a company has to make. It therefore needs to be well-thought out and planned, which may be difficult for businesses just weeks from this NICs price hike.

Tax Britannica?

What this survey has revealed is huge questions over whether this NICs hike – hoped to help our ailing services – could actually stall business growth or even sound a death knell for some ventures.

Nearly 70% of respondents say that they already feel that the rate of taxation on their business is high.

The Government has increased the employment allowance to help offset the higher NICs rate, but 28% of SMEs say this simply isn’t enough.

So will the NICS hike stymy growth? Seema Desai, iwoca’s Chief Operating Officer, says yes. “Based on our survey, rising employer NICs are likely to result in slower wage growth and job losses among SMEs.

“While the increase in employment allowance provides some relief, higher costs overall could limit SMEs’ ability to invest and grow – and that’s something we need them to do to help boost economic growth in the UK.”

It seems the majority of UK SMEs are now counting down the days with trepidation.