A 'tax on jobs'? What an increase in employer national insurance contributions could mean for your business

Rachel Reeves and the Prime Minister have said the Budget will involve “tough” decisions, after previously saying there is a £22 billion “black hole” in the UK’s public finances left by the former government.

Reeves and Sir Keir Starmer have declined to rule out increasing employers’ national insurance contributions, stressing instead that Labour has promised not to raise taxes on “working people”.

The bulk of NI revenues come from employer contributions, which made up an estimated 63 per cent of all revenue in 2023 to 2024, according to figures from the Institute for Fiscal Studies (IFS).

Britain's Chancellor of the Exchequer Rachel Reeves speaks on the second day of the annual Labour Party conference in Liverpool, north-west England, on September 23, 2024. (Photo by Oli SCARFF / AFP) (Photo by OLI SCARFF/AFP via Getty Images) | AFP via Getty Images

Whereas employee contributions made up about 35 per cent, and self-employed contributions accounted for less than three per cent.

What is the current rate of employer national insurance?

Employers currently pay 13.8 per cent on earnings above £175 a week, or £9,100 a year, under Class 1 NI contributions.

It is deducted and set aside for HMRC before wages are paid out.

The employment allowance allows eligible businesses to reduce their NI liability by up to £5,000 a year, which takes many small firms out of paying employer NI contributions altogether.

What changes could the Government make and what would it mean for the economy?

A one percentage point increase in the Class 1 rate could raise £8.45 billion over the 2025 to 2026 tax year, and a two percentage point hike could raise £16.9 billion, according to data compiled by HMRC and EY.

This would go some way to closing the £22 billion “black hole” which Reeves said had been inherited by the previous Conservative government, and to help fund spending promises.

There has also been speculation that the Government was considering introducing NI on employer pension contributions as a way of raising additional revenue.

The IFS calculated that this could raise around £17 billion per year if taxed at the same 13.8 per cent rate.

Chancellor of the Exchequer Rachel Reeves makes her keynote speech during the International Investment Summit in London, which brings together up to 300 industry leaders to boost investment in the UK. Picture date: Monday October 14, 2024. Jonathan Brady/PA Wire | PA

What could it mean for businesses?

Experts have cautioned that any increase in national insurance would mean higher costs for businesses, which could impact their staff and customers.

Rob Morgan, chief investment analyst at wealth manager Charles Stanley, said: “Employers consider the total cost of an employee, which includes employer NI contributions and pension contributions.

“If these were to increase it could lead to businesses restricting new hires, limiting pay rises or scaling back pension payments.

“Yet some may instead look to pass these costs on in terms of higher prices.”

Could some businesses be affected more than others?

Chris Sanger, a tax policy leader for EY, said that “labour-intensive” businesses are more likely to be squeezed by a tax increase than more “capital-intensive” firms, which rely more on things like machinery or intellectual property than staff.

It means that any increase in employer NI could put a greater burden on businesses with more employees, particularly affecting those the services sector like hospitality and entertainment, he said.

Kate Nicholls, the chief executive of trade group UKHospitality, warned that an increase could be a “tax on jobs”, adding: “An increase would particularly hammer sectors like hospitality, where staffing costs are the biggest business expense.”