What are employer NICs and are they a 'tax on working people'?

Chancellor Rachel Reeves has raised national insurance contributions for employers in the budget.

TOPSHOT - Britain's Chancellor of the Exchequer Rachel Reeves poses with the red Budget Box as she leaves 11 Downing Street, in central London, on October 30, 2024, to present the government's annual Autumn budget to Parliament. Britain's new Labour government unveils its first budget on Wednesday, the highly-anticipated fiscal update, the first under the centre-left government after 14 years of Conservative rule. (Photo by Adrian Dennis / AFP) (Photo by ADRIAN DENNIS/AFP via Getty Images)
Rachel Reeves leaves 11 Downing Street ahead of delivering the budget. (AFP via Getty Images)

Rachel Reeves has increased national insurance contributions (NICs) for employers, saying the measure would help "fund our public services" and "restore economic stability".

In her first budget as chancellor, she said: "I know this is a difficult choice. We are asking businesses to contribute more and I know there will be impacts of this measure beyond businesses, too."

Leading economists have argued increasing NICs for employers is effectively a tax on the earnings of employees, although Reeves said alongside her announcement that 865,000 employers will not pay any national insurance at all next year.

National insurance 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, to qualify for certain benefits and the state pension.

If you are employed, you pay class 1 NICs, which under the current rates is 8% if you are paid between £1,048 to £4,189 a month, and an additional 2% if you are paid more than £4,189 per month.

How much employers deduct from employees' pay. (Yahoo Finance/Flourish)
How much employers deduct from employees' pay. (Yahoo Finance/Flourish)

You will pay less if you are a married woman or widow with a valid "certificate of election", or if you are deferring your national insurance because you have more than one job.

Self-employed people pay class 4 NICs, depending on their profits, with most people paying through their self-assessments at 6% on profits of £12,570 up to £50,270 and 2% on profits over £50,270.

Employers also contribute to a portion of their staff's national insurance, and this varies depending on the employee's national insurance category and their earnings.

Depending on these two factors, employers previously paid either 0% or an additional 13.8% of the worker's earnings, as set out on the government website.

Employees are not seeing increases to their NICs, but employer NICs will be increased by 1.2% – from 13.8% to 15% – from April next year.

The government has also reduced the level at which employers pay NICs on each employee's salary from £9,100 to £5,000.

However, alongside the announcement, the chancellor said some 865,000 employers will not pay any national insurance 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.

Reeves said the measures will "raise £25bn per year by the end of the forecast period".

Employee and employer national insurance rates. (PA)
Employee and employer national insurance rates. (PA)

The Office for Budget Responsibility (OBR) expects companies to pass on "most but not all of their higher tax costs to employees", according to Steven Swinford, political editor of The Times.

It also forecasts that 60% of higher costs will be passed on to workers and consumers via lower wages and higher prices, he added.

Stuart Adam, senior economist at the Institute for Fiscal Studies (IFS), told Yahoo News UK ahead of the budget: "Employer NICs are a tax on the earnings of working people."

One of the key questions surrounding employer NICs, the IFS said, is on "economic incidence": a measure of who is ultimately made worse off by a tax, regardless of whether they are legally liable to pay it.

Adam pointed to a 2021 analysis by the OBR that said, after a year, 80% of an increase would be passed on to lower wages and 20% to higher prices.

"In the long run, we would expect the majority of a rise in employer NICs to be passed on to workers in the form of lower wages." He warned it could also "weaken" employment incentives.

And speaking after Reeves' announcement, IFS director Paul Johnson said it would "proportionally hit harder those employing lower-paid workers. Probably three-quarters or so of the increase will flow through to lower pay."

Watch: Rachel Reeves announces increase in employers’ national insurance contributions

Martin Lewis, the founder of MoneySavingExpert.com, also raised concerns that the threshold reduction could impact wages.

"For the employers who pay it, at the new 15% rate that alone is £615 increased cost per most employees per year. The question is where will that money come from: profits, increasing charges or reducing salaries/benefits?"

Recruiters also expressed concerns it could impact hiring. 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 NICs 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.”

In its election manifesto, Labour said it "will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT".

But the party made no distinction between employer or employee NICs in the document, which it is now being challenged over. During the election campaign, the Conservatives repeatedly urged Labour to explicitly rule out a hike in employer contributions, but party figures refused to make that commitment.

And responding to Reeves' budget, outgoing leader Rishi Sunak said: "Just this month, the prime minister gave an absolute commitment to not raising tax on working people.

"So what does today's budget do? It raises tax on working people by increasing national insurance and breaking Labour's promise. This tax rise is passed through entirely to working people."