Raising employers’ NI contributions would hurt business and could backfire on Labour
Rachel Reeves is widely expected to raise national insurance on employers in Labour’s first Budget, in what’s been described as a “tax on jobs”.
So what? The description is harsh but fair. Raising business taxes will squeeze companies’ margins. It may also
- trigger a slowdown in hiring
- curb pay rises and
- reduce pension savings
Unintended consequences. None of the above would be welcome given the Chancellor wants to court investment in the UK and encourage people to return to work.
Labour’s manifesto pledged not to increase taxes on “working people”. That is why Reeves has pivoted to business in her search for revenue, and refused to rule out an increase in employers’ NI contributions, currently levied at 13.8 per cent of a worker’s earnings.
She could also change the rules so companies are required to pay NI on contributions to their employees’ pensions. Either way…
- The most labour-intensive companies will be worst affected, from hospitality to retail.
- The immediate impact will be felt by consumers rather than workers. Survey data suggests one in four employers will look to pass the cost increase on to consumers.
- A third potential impact is on working conditions.
Turn on. Research suggests there’s been a sharp increase in the intensity of work since the 1990s. That is partly to do with growing use of computers, which requires more cognitive effort from humans, but also to do with organisational changes at work.
A hiring slowdown caused by rising labour costs is likely to accelerate this. “One of the trends with the higher national minimum wage in hospitality was work intensification,” says Neil Carberry, chief executive of the Recruitment and Employment Confederation. “People were going from waiting on 15 tables to waiting on 20.”
Tune in. Workers were also pushed to show greater flexibility, Carberry said: “Hotel staff are flowing around the hotel following the customer – serving breakfast in the morning and checking guests in during the afternoon.”
Drop out. A hit to retirement savings is likely too. Around 40 per cent of employers paying more than the minimum into staff pension pots would reduce their contribution if NI is imposed, according to a poll by the Association of British Insurers. Salary sacrifice schemes where workers give up a chunk of pay for a larger pension contribution from their employer may stop making financial sense.
- It might even encourage the reverse, a “pension sacrifice”. This summer, United Learning, a trust that runs academy schools, said it would offer higher salaries to teachers willing to accept less generous pension contributions. Expect others to follow if workers come to prefer flexibility in the present to stashing funds away for future decades.
Zoom out. Labour is also introducing an employment rights bill which makes big changes, including
- protection against unfair dismissal from day one (there’s currently a two year qualifying period), and
- an end to zero hours contracts – which will be replaced by an offer of a guaranteed number of hours.
Changes like these are likely to have the sharpest impact on the same sectors affected by an NI increase; those with the tightest margins and lowest pay. An expected increase in Capital Gains Tax on share sales also adds to friction for entrepreneurs and investors.
Broken promises. Raising NI on employers is within the letter but perhaps not the spirit of Labour’s manifesto pledge. Paul Johnson of the Institute for Fiscal Studies has described this as a “straightforward breach” of the party’s manifesto commitment.
F*** Business. But, for all that, businesses are likely to be patient with Labour. That’s partly because the previous government’s dismissive attitude and the economic harm of Brexit cast a long shadow.
Business leaders are also aware of how few options Reeves has, having capped corporation tax at 25 per cent and ruled out an increase in income tax. Business scepticism has been soothed by the fact that changes to employment rights are still subject to lengthy consultation – most of the changes will not take effect for two years.
What’s more… All will be forgiven if effectively targeted public spending succeeds in boosting growth.
