How would a National Insurance rise affect employers?

The chancellor of the exchequer, Rachel Reeves, is expected to announce a rise in employer contributions towards national insurance, as speculation mounts about the imminent budget.

During the government’s international investment summit earlier this week, Reeves stated that this increase wouldn’t be ruled out and that businesses would need to understand its necessity.

“You know there is a £22bn 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,” she said. “So we are going to need to sort of close the gap between what government is spending and bringing in through tax receipts.”

Of course, for small businesses struggling with high overheads, the prospect of increased NIC will feel daunting. We’ll break down the likely impact in this guide.

How would a NIC increase affect employers?

Employers are already required to pay a portion of NI contributions for each employee. When NI rates increase, the cost of hiring employees rises. This could negatively impact a company’s overall wage bill, and increase pressure on its operating budgets, particularly if it employs a large workforce.

The current National Insurance contribution rate is 13.8% on earnings above a threshold of £9,100 per year. For example, if a business pays an employee £30,000 annually, the employer would contribute £2,884.20 per year towards NIC. That’s assuming the employee isn’t under any NI relief schemes, such as those for apprentices or younger workers.

Employers facing high overheads and rising staffing costs may already feel significant financial pressures. An increased cost of employing staff, alongside other factors such as rent, utilities and supply chain expenses, would have a detrimental effect on a company’s profit margins. To offset all of this, it’s likely businesses would be forced to raise prices for customers; reduce their hiring; offer smaller starting salaries for new staff, or even consider layoffs to control the costs.

Chief executive of UK Hospitality Kate Nicholls said that the increase would “particularly hammer sectors like hospitality, where staffing costs are the biggest business expense”.

She added: “Hospitality businesses are much less able to stomach yet another cost increase when they’re already managing increases in other areas like wages, food, drink and energy.”

Andy Fishburn, Managing Director at Virgin StartUp, also commented that the increase could hinder small businesses and SMEs from growing.

“While this expected rise in employer’s National Insurance will provide an immediate short term boost to the government’s coffers, it will also impact new businesses that are looking to increase the number of people they employ, potentially curtailing their plans to grow and scale over the next few years,” he said.

What could be the impact on employees?

An increase in National Insurance contributions could also have unfavourable effects on employees. Most notably, workers could see a reduction in their take-home pay, if their employer chooses to slow the rate of pay increases or offer smaller starting salaries for new hires. Considering the current cost of living crisis, this could create even more financial strain.

“With inflation still not entirely snuffed out this could ramp up the cost-of-living pressures on working families,” Rob Morgan, chief investment analyst at Charles Stanley, commented.

“However, the effects are not clear cut. Employers consider the total cost of an employee, which includes employer NICs 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.”

The added financial pressure on employers could also lead to reduced hours or even redundancies to cut back costs – leading to employees feeling uncertain about job security. 

Employers may look to adjust employee perks and benefits packages as well, including cuts to bonuses or even to additional pension contributions, which could harm both employee satisfaction and financial wellbeing.

Labour’s manifesto for “working people”

Reeves stated that part of Labour’s election pledge was not to increase NI for “working people”. 

“We were really clear in our manifesto that we weren’t going to increase the key taxes paid by working people, income tax, insurance and VAT,” Reeves said.

Prime Minister Keir Starmer also stated that the government made an “absolute commitment” to not raise taxes on working people and that the first Labour budget would “prioritise stabilising the economy, fixing the foundations and growing our way to a better While the increase in NICs is intended to address a significant national budget deficit, it could further strain employers already struggling with high overhead costs.

In turn, this poses the risk of reduced hiring, limited wage growth, redundancies and cuts to employee benefits. As the government tackles the “black hole” in its budget, a difficult decision lies on its shoulders to balance the urgent need for generating revenue with the potential consequences for economic stability and the wellbeing of both businesses and workers.

However, others have argued that increasing employers’ NIC is a “straightforward breach” of Labour’s manifesto pledge.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), said: “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.”

Meanwhile, Alex Veitch, director of policy at the British Chambers of Commerce, added that raising NICs would “hobble growth and lead to businesses having less money to invest in their staff”.

“Firms are run by working people,” he said. “Nearly all UK companies are small, with many family-owned, and they are the anchors in our local economies.”

Craig Beaumont, executive director at the Federation of Small Businesses, commented: “You don’t get to a pro-small business budget without the government honouring its cast-iron manifesto commitment to not increase National Insurance contributions, including on small employers.”

Fishburn added: “Labour’s Manifesto pledged to not raise taxes for ‘working people’, and we need to remember that small businesses are run by working people who are looking for the government for reassurance that the UK is committed to helping startups thrive.”