Craig Simpson, Tax Partner at Bates Weston, looks at the rumoured increase in Employers National Insurance, widely expected to be announced by the Chancellor in the Autumn Budget on 30 October and the decisions facing many employers as a result.
Craig begins by posing a question.
Budget 2024 – When is an increase in National Insurance not an increase in National Insurance?
The Chancellor of the Exchequer, Rachel Reeves, has paved the way for a National Insurance increase in the Budget on 30 October.
Despite a promise not to increase National Insurance, it appears that the definition of National Insurance does not include Employers National Insurance. And so more speculation is heaped on speculation. I wonder if this can be doing anyone any good?
Broadly, employers currently pay 13.8% National Insurance on their gross payroll cost and a minimum of 3% employer pension contributions. If a company payroll cost is above £3m then they are also required to pay 0.5% apprenticeship levy. So employing an individual currently costs an additional 17.3% of their salary for many employers. I expect many employees have little understanding of this extra cost, making an increase in Employers National Insurance an easy tax target without a direct impact on the “working person”.
What seems to be misunderstood though is that any increase in the cost of employing someone will impact the employee in some form.
Business options if Employers National Insurance is increased
Business will have a number of choices:
- Swallow the cost, which reduces the amount of profits available to reinvest in the business.
- Pass on the cost indirectly to the employee through reduced pay rises in the following year.
- Recruit less people. An increasing payroll cost means less money in the pot to take risks on bringing more people into a business.
- Increase prices and pass the cost on. Clearly this is challenging, as most businesses cannot “just increases prices” and price increases could fuel inflation.
There is speculation that Employers National Insurance could be levied on employer pension contributions. This would mean 3% employer pension cost is increased to 3.41% making a total employer on-cost of 17.71% of annual gross payroll cost. Or even worse, an increase in the Employers National Insurance rate from 13.8% to say 14.8% making a total employer on-cost of 18.3%.
What is clear is that the Chancellor has a difficult task in raising taxes and it does seem that increasing Employers National Insurance is the stealthiest option.