The rates of national insurance (NIC) paid by employers and employees are all going to rise by 1% from April 2011. People earning less than £20,000 will be immune. Unlike income tax, NIC discriminates between employed and self-employed with lower rates for the self-employed.
The changes are estimated to yield an additional £6.5 billion between 2011 and 2013. This dwarfs the £550 million expected to be raised by the much publicized one-off bank bonus tax.
For example, an employee earning the mean UK salary (full time £31,323), the total cost of employment would be £34,600 in 2009-10. If net pay increased by 2.9% (forecast RPI) for 2011-12 total cost would be £36,428. This means a 5.3% increase in employment costs to allow an inflationary increase in net pay.
Unemployment is expected still to peak at 3 million (9.6%), so businesses should be encouraged to take on staff, this will certainly not!
The recent US November unemployment figures showed a fall from 10.2% to 10.0% and spurred consumer and investor confidence, although some dismissed it as a blip. Therefore, employment is pivotal to the economic recovery.
Overall, raising NIC will have a detrimental effect on the recovery and may stifle some “green shoots”. This is a view shared by many business leaders - Richard Lambert, CBI Director-General, said “The Chancellor has made a serious mistake imposing an extra jobs tax when the economy is still fragile.” and David Frost, Director General of the British Chambers of Commerce, “The NIC rises mean a brake on employment growth. While everyone understands the importance of restoring the public finances to a sustainable path, a tax on jobs in not the way to do it.”
However, with borrowing of £176bn predicted for 2010-11, net debt at 65% of GDP and a promise to protect frontline services, the money has to come from somewhere. A rise in VAT beyond 17.5% was mooted but not announced – this has problems as it’s not a progressive tax and consumers are unable to reclaim it, so would hit the poorest. Darling is in a corner!
In the face of the mind-boggling borrowing figures, one can imagine how he thinks the rise fits the precarious balancing act of voters, borrowing and economic recovery performed at 11 Downing Street. Unfortunately, tax on jobs is a risky option.
Whether it dangerously cools the job market or is ever even enacted - only time will tell.
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