National Insurance Rise Will Land Squarely on Workers

File image of Rachel Reeves. Picture by Zara Farrar / No 10 Downing Street.

A bad idea is about to be given a second airing as the Government looks ready to raise employer National Insurance (NI).

The Conservatives tried it, but quickly u-turned when faced with the reality that raising NI contributions from employers is a bad tax.

"Increasing employers' national insurance would be a bad idea. A hike in NI represents a straightforward increase in business costs," says Anna Leach, Chief Economist at the Institute of Directors.

The response follows a surge in speculation that the government will raise the National Insurance paid by employers but not the NI contributions from staff pay packets.

This allows the government to maintain a manifesto commitment to not raise taxes on working people.

However, this is semantics, and Leach says the move will ultimately "hit employment prospects and earnings... the effects of higher national insurance costs will be borne by workers."

"It is essentially the equivalent of a poll tax on companies and takes no account of whether a business is profitable or not," she adds.

The Office for Budget Responsibility says the tax is passed through entirely to lower real wages in the medium term, with 80% of the increase passed through to workers via lower nominal wages and 20% to consumers via higher prices.

The IoD says the tax hike would come at a time of declining business confidence and deteriorating hiring intentions.

In 2022, the Conservative government increased the main rate of employer NI contributions by 1.25% points.

However, this increase was reversed the same year in the face of widespread concerns about its impact on a fragile economy.

Chancellor Rachel Reeves also knows it is a bad idea, setting out to Parliament on March 2022 Labour’s opposition to the Conservatives' national insurance tax hike.

A petition launched in February 2022 by the IoD (#ScrapTheJobsTax) gathered nearly 200,000 signatures from businesses and members of the public.

At that time, a study from the independent National Institute of Economic and Social Research (NIESR) said:

"The government-announced employment tax increase… adds needless complexity to the tax system, encourages self-employment rather than employment, and hits hardest the labour-intensive sectors that suffered most from Covid. It will encourage a shift away from labour-intensive sectors and reduce the UK's international competitiveness."

"We strongly encourage the government to reconsider its tax plans, and rule out an increase in employers’ national insurance at the earliest opportunity," says Leach.