Employer national insurance hike to slow hiring and wage growth, critics say

The Chancellor has admitted that hiking employer national insurance will be felt “beyond businesses”, as critics warn changing the UK’s second-biggest tax will have a knock-on impact on hiring, wages and staff benefits.

Rachel Reeves announced the tax increase in her autumn Budget statement to the House of Commons.

The rate of employers’ national insurance (NI) will rise by 1.2 percentage points, from 13.8% to 15% from April next year.

The secondary threshold – meaning the level at which employers start paying the tax on each employee’s salary – will also be reduced from £9,100 a year to £5,000.

Ms Reeves said the measure would raise £25 billion per year until the end of its forecast period.

“I know this is a difficult choice,” Ms Reeves said, adding: “I do not take this decision lightly.

“We are asking business to contribute more, and I know that there will be impacts of this measure felt beyond businesses.”

Experts have said the greater tax burden will lead many businesses to look for other ways to reduce their costs.

It comes as firms will also bear the brunt of a 6.7% increase in the national minimum wage to £12.21 an hour next year.

Brian Byrnes, the head of personal finance at Moneybox, said: “With employers shouldering more of the national insurance burden, the worry is they could simply pass these costs on to their employees.

“With a higher cost per head, we could also see some employers choosing to reduce other benefits such as wage increases or even pension contribution matching.”

Benoit Hudon, chief executive of consultancy Mercer UK, agreed that the rise will “make each UK recruit more costly, potentially stifling hiring, limiting pay rises, or possibly even leading to a reduction in benefits and pensions”.

“Consequently, working people risk bearing the brunt of this increase, as businesses try to balance the books and remain competitive,” he said.

Ms Reeves stressed she was committed to protecting “working people” in the Budget, and confirmed there would be no increase to national insurance, VAT or income tax for employees.

NI contributions, which are the UK’s second-biggest tax behind income tax, are paid by employees and self-employed workers on their earnings and profits, and by employers on top of the wages they pay out.

Alongside the announcement, the Chancellor said some 865,000 employers will not pay any NI next year because of the employment allowance rising from £5,000 to £10,500.

This means eligible businesses will be able to reduce their NI liability by a greater amount each year, removing it completely for some firms with a handful of staff.

Nevertheless, recruiters are reportedly preparing to slow down hiring as a result of the tax measure.

Lee Biggins, chief executive of jobs site CV-Library said: “We’ve heard from our customers – some of the UK’s biggest recruiters – that the increase in employer national insurance contributions announced in today’s Budget is likely to result in a decrease in hiring.

“Employers will need to shoulder the cost and there is a very real worry that it will ultimately hit workers through lower wage growth or less hiring.”

Martin Willis, a partner at consultancy Barnett Waddingham, pointed out that businesses could turn to their employee pension schemes as a way to restrict staff benefits and shore up more cash.

“The real losers here will be those at the receiving end of any cost-cutting exercises employers may take,” he said.

“Businesses will have to recoup the savings made on this relief from somewhere, with employer pension contributions potentially in the firing line.”