Chancellor Rachel Reeves this week has given the strongest hint to date that she could hike national insurance contributions for employers in the Budget.
She has long been seen as an advocate for economic policies that strike a balance between growth and fairness.
However, recent indications that she may raise National Insurance Contributions (NIC) for employers – a move branded by the Conservatives as Labour’s jobs tax – could mark a significant shift in her approach.
For businesses, this proposal threatens to bring further challenges at a time when many are still dealing with the effects of inflation, among other cost issues.
The possibility of increasing NICs for employers has not been explicitly confirmed by Reeves, but tellingly, she has failed to rule it out. What’s even more striking is that this comes after Labour made a pledge during the election not to raise income tax, VAT, or national insurance.
Labour, however, is now drawing a distinction between employee and employer contributions, claiming that their manifesto promise only applies to the former. In her earlier years, Reeves was critical of policies she deemed anti-business, including measures that placed undue burdens on employers.
She knows all too well that any increase in employer NICs is, in effect, a tax on work. Companies are currently required to pay 13.8% on earnings above £175 per week for each employee they hire. Hiking this rate, even by just 1 percentage point, could raise as much as £17 billion annually for the Treasury, according to economists. But, in my opinion, this revenue would come at a significant cost to the economy.
At its core, raising NICs on businesses disincentivizes hiring and investment. Employers, particularly small and medium-sized enterprises (SMEs), are already operating on thin margins, and an increased tax burden would only make it harder for them to expand or take on new staff. The Office for Budget Responsibility (OBR) has also warned that raising employer NICs could lead to lower wages, as businesses seek to offset the increased cost of employing staff.
This means workers, many of whom are already struggling with stagnant wages and rising living costs, could see their incomes shrink further. In addition to hurting wages, an NIC hike would likely stifle job creation.
Employers faced with higher payroll taxes will be more hesitant to hire, particularly in sectors that rely on lower-wage workers. This could lead to slower employment growth at a time when the economy needs more jobs to fuel growth. With businesses cutting back on hiring or opting for cheaper alternatives like automation, the broader effects on unemployment would be profound.
Then there’s the issue of investment. Higher taxes on employers inevitably reduce their appetite to invest in new projects, tech, or workforce development. Instead of expanding, companies might choose to hold back on spending or redirect their investments to more tax-friendly jurisdictions.
This could particularly affect sectors like manufacturing and technology, where large capital investments are necessary for growth. For an economy that desperately needs innovation to drive future prosperity, an employer NIC hike is precisely the wrong kind of policy to pursue.
Beyond the immediate financial implications, there’s also a broader question of fairness. Why should employers, who already contribute to the economy by providing jobs and generating growth, be singled out for higher taxes?
Targeting businesses in this way feels like a short-term fix for the Treasury’s revenue needs, but one that will create long-term damage. There are other ways to raise the necessary funds without stifling job creation or investment, but increasing NICs on employers is not one of them.
If the goal is to find more revenue for public services or to reduce the deficit, then the government should consider alternatives that don’t punish businesses for hiring people. A tax on jobs is not the answer. What the UK needs is a business-friendly environment that promotes growth, job creation, and prosperity for all.
