Raising employer National Insurance Contributions could result in workers facing pay cuts if companies try to keep their staff costs fixed. 

• A company that employs 10 people earning £30,000 would see its national insurance contributions increase from £28,842 to £33,022, if the rate goes up by two per cent.


• If the company responded by reducing wages to keep its employment costs fixed, this would result in a £361 pay cut, reducing their take-home pay by £260.


• A 2p increase would raise £9 billion in FY2025 if employers pass on the full burden to employee wages, or £18 billion in FY2025 if they pass the burden to consumers or shareholders.

As reported in the Times, the UK Government may raise National Insurance Contributions (NICs) for employers in Wednesday’s Autumn Budget. According to new research published by the Institute of Economic Affairs and conducted by PolicyEngine, businesses may respond to the change by reducing pay.

Employers pass on part of the cost of increased payroll taxes to employees through lower wages, reduced hiring, or both.

The new research, modelled by PolicyEngine’s Chief Technology Officer Nikhil Woodruff, considers the impact of the change on an employee earning £30,000. Today, the employer would pay National Insurance Contributions of £2,884. So, they pay £32,884 per year to employ the worker between salary and NICs.

If the Government raises the employee NIC to 14.8%, and the employer does not change the salary, then the NIC paid by the employer rises to £3,093.

However, the employer may respond to the NIC increase by reducing the employee’s wages. To keep the total cost of employment fixed at £32,884 between salary and NICs, they would have to lower their salary to £29,818.

This research illustrates one of the most important principles of tax policy: the incidence of tax, who ultimately bears the burden, doesn’t always fall on who pays it. Just as the incidence of VAT largely falls on consumers in the form of higher prices, the burden of employer NICs often falls on workers.

The loss of wages would leave workers with less disposable income amid rising cost of living.

Tom Clougherty, IEA Executive Director and Ralph Harris Fellow, said:

“The government’s rumoured plan to increase employer National Insurance contributions highlights two important principles of tax policy.

“First, the incidence of a tax doesn’t always fall on the person who pays it. When we tax businesses, it is often workers who end up bearing the burden in the form of lower wages.

“This means the idea of tax hikes that don’t hit ‘working people’ is little more than a political fantasy.

“Second, tax affects behaviour – and the choices people make in response to a tax increase (or a tax cut) can have a significant impact on how much revenue is raised.

“A good tax system would seek to be as transparent as possible about who really foots the bill, while also seeking to minimise its impact on economic decision-making. We are a very long way from that ideal at the moment.”

Nikhil Woodruff, Chief Technology Officer at PolicyEngine, said:

“PolicyEngine’s analysis reveals that reforms to employer-side National Insurance could generate billions in revenue, but the actual amount depends on how employers pass on the costs – with full pass-through to employees lowering the revenue impacts by up to 50%.”

ENDS

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Notes to Editors