Small businesses and economists have warned that the government’s £11bn national insurance tax grab to pay for social care costs could hurt economic recovery and result in unemployment.
Business secretary Kwasi Kwarteng has raised concerns with the Chancellor about the upcoming rise in National Insurance.
Mr. Kwarteng is said to be concerned that the National Insurance rise will reduce hiring, as the cost of each staff member to businesses will be much higher.
Under the change, employers and employees will each be taxed an extra 1.25 per cent.
Many economists have warned that the £11bn national insurance contribution (NIC) hike will create unemployment and negatively affect future job creation.
New rates will cost employers around £6.5bn (staff members would pay an extra £4.3bn).
The Federation of Small Business has warned that more than 50,000 jobs in UK SMEs are at risk due to the National Insurance hike, which will cost British businesses £5.7bn alone.
However, the chancellor is said to still be in favour of the rise, which will be used for social care. Mr. Sunak is said to be aware that if the tax rise is delayed, it will be much harder to introduce, as the next general election approaches.
Chief economist at Investec, Mike Cherry, has suggested that middle way could be abandon the employees’ NI rise to spare their pay, whilst firms still pay the additional contribution.
Mike Cherry, chairman of the FSB, said: “Business owners who have done all they can to retain and support their staff during the pandemic are now being punished for that loyalty with an £11bn increase in NICs, which essentially serve as a jobs tax.”
Andrew Goodacre, chief executive of the British Independent Retailers Association, said: “Of all the options available to the Government, it is disappointing that increases in national insurance have been chosen because of the impact on lower paid workers and small businesses … despite all the positive economic data, this recovery is still very fragile”.
Paul Dales, who is a chief UK economist at Capital Economics, has said there could be 130,000 left unemployed in two years if the National Insurance rise reduces GDP and the increased spending on NHS and social care costs do nothing to offset it.
The Centre for Economics and Business Research has estimated that if a quarter of small businesses do not hire one extra employee because of increased national insurance, it could cost 350,000 jobs.
The planned 1.25 per cent percentage increase is for both employer and employee NICs.
Around two-fifths of all NICs are paid by employers and the rest borne by staff.
Self-employed company directors will also be hit by 1.25 per cent rise in how they pay themselves dividends.
The rate on employer contributions paid by small businesses will increase to 15.05 per cent, up from 13.8 per cent.
However, Boris Johnson has commented that two-fifths of businesses would not pay the new levy due to the employment allowance, which waives the first £4,000 of employer NICs for businesses with less than £100,000 of total NICs liabilities.
The self-employed currently pay slightly lower rates “class four” contributions. The rate they pay will increase from 9 per cent to 10.25 per cent on annual earnings over £9,568 and up from 2 per cent to 3.25 per cent on anything more than £50,270.
Some lower-earning freelancers pay “class two” national insurance at a rate of £3.05 a week on annual earnings from £6,515 up to the class four £9,568 threshold. The national insurance hike will not apply to “class two” contributions.
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