Labour’s national insurance hike could cost workers hundreds

Hiking employers’ national insurance will likely end up making employees worse off despite the government’s attempts to ensure new taxes do not fall on working people, new research suggests.

Reports indicate that Rachel Reeves is planning to hike employer national insurance by one or two percentage points while also lowering the threshold at which businesses start paying the levy.

HMRC’s projections suggest that a two percentage point hike to employers’ national insurance would raise £18bn.

The government is targeting its tax hikes at businesses after excluding increasing taxes on ‘working people’ in its manifesto.

But the right-leaning free-market think tank Institute of Economic Affairs (IEA) said that workers could easily see their pay packet fall if firms cut wages in response to the tax hike.

According to their estimates, a company employing ten people earning an average of £30,000 each would see its bill for employer national insurance contributions rise from £28,842 to £33,022 a year if the rate goes up by two per cent.

The IEA argued that if the company responded by reducing wages to keep its employment bill fixed, it could cut wages by £361 overall.

That would cut an employee’s take-home pay by £260 on average.

Tom Clougherty, executive director at the IEA said: “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,” he added.

The IEA pointed out that if firms fully passed on the increase to their workers through lower wages, then tax receipts through other levies—such as income tax—would also fall.

“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,” Clougherty said.

Business groups have warned the government against lifting employers’ national insurance, warning that it will knock hiring plans and stymie growth.

Toby Tallon, a tax partner at Evelyn Partners, said the expected increase will be “keeping many business owners awake at night”.