The Chancellor delivered her largest Budget tax rise in the form of an increase in employers’ national insurance contributions.
The widely-expected Autumn Budget increase will see businesses pay more towards their employees’ pensions, increasing from 13.8 per cent to 15 per cent, raising £25billion a year.
The threshold at which employer national insurance is charged has also been slashed from £9,100 to £5,000 a year. The changes come into play in April 2025.
Labour repeatedly said it would not raise taxes on working people, but businesses have warned that the move could have detrimental effects on jobs and pay. The Office of Budget Responsbility expects 76 per cent of the hike to be passed on in lower wage rises.
Businesses bear the brunt: Rachel Reeves increased employer NICs in her Budget
Why is the Chancellor raising employer NICs?
Rachel Reeves’ first Budget directed plenty of blame at the previous Tory government for leaving the public finances in a dire state.
She previously said she would need to raise taxes in order to plug a claimed ‘£22billion black hole’ in the public finances.
However, Labour’s manifesto ruled out increases in income tax, national insurance and VAT, leaving her with little to tinker with.
It means Reeves had to find tax rises elsewhere. Theoretically, raising employer NICs does not directly affect employees because their take home pay remains the same. Instead, it’s the employers who have to take the hit.
However, an NI increase for employers has been dubbed a ‘tax on jobs’ and could continue to affect the already dwindling confidence in the Government.
Some businesses have already warned that they will have to pause hiring, wage increases and pension contributions.
Will the employer NI hike affect take home pay?
Riasing employer national insurance contributions does not affect pay packets directly but will create a potential drag on earnings.
Currently, employers pay NI at 13.8 per cent on a worker’s earnings above £9,100 a year, but in April 2025, this will change to 15 per cent on earnings above £5,000.
The increase coupled with a reduction in the secondary threshold – the point at which NICs are paid – means employer taxes rise by a quarter for an employee earning £36,000, according to tax firm Blick Rothenberg.
The burden lies on businesses, as Reeves reconfirmed her commitment to not taking money from the pockets of working people.
Employee NICs will stay at the same level of 8 per cent down from 12 per cent last year, after former Chancellor Jeremy Hunt cut them by 2p in his March Budget, following a 2pm reduction at the start of the year.
Although take home pay is unaffected, changes to employer NICs will almost certainly trickle down to employees.
The changes to NICs coincide with the announcement that the minimum wage will increase to £12.21 for over 21s, and £10 for those between 18 and 20.
Extra costs act as a drag on future pay rises and bonuses for employees, as businesses grapple with additional costs.
Fiona Fernie, partner at Blick Rothenberg says: ‘Rachel Reeves’ increase in employers’ NIC may not (technically) break the Government’s manifesto pledges.
‘However, neither is it likely to encourage business growth.
‘Indeed, the increased cost of employing staff is likely to have a negative rather than a positive impact, either in terms of less staff recruitment or lower wages – assuming that employers follow the rules meticulously.’
The changes could also have an impact on pension contributions and other perks, like healthcare, as businesses balance the higher costs. The government stopped short of adding employer NI to pensions, an idea that had been blasted by experts.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown adds: ‘Heaping extra costs on employers, alongside a planned uplift in the minimum wage will likely result in lower wage increases over the longer term.’
Morrissey said: ‘Longer term we need employers to boost their pension contributions beyond auto-enrolment minimums as the government attempts to boost auto-enrolment.
‘However, given the extra demands placed on employers by increased NICs.’
What about smaller businesses?
Rachel Reeves sought to soften the blow for smaller businesses by raising the employment allowance from £5,000 to £10,500. This lets smaller firms with less employees lower their NI liability.
She said this means 865,000 small employers won’t face NI charges next year, explaining it was the equivalent of four full-time workers on the new national living wage.
How will hiking employers NICs affect the economy?
Reeves said she was delivering a budget for growth but there is a risk that raising taxes on businesses could backfire and suppress economic activity and deter international firms from investing in the UK.
It could also act as a disincentive for employers to recruit new workers, particularly young employees, meaning UK productivity could take a hit.
Robert Salter, partner at Blick Rothenberg said: ‘The increase in the National Minimum Wage for young adults – which will increase by 16.3 per cent from April 2025 – will simply make it increasingly unlikely that small businesses will invest in recruiting younger, less experienced staff.
‘This will realistically therefore result in increasing numbers of NEETs – i.e. those not in employment, education in training.’
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