Is Employers' National Insurance a Tax on 'Working People'?

Yes

Hopefully you’re not feeling too rough today. I know there is a lot of other stuff going on in the world but here is something which has been in my drafts for a while so needs using up.

During the General Election campaign Labour repeatedly stated that it would not increase any of the three main taxes paid by working people, namely Income Tax, VAT, and National Insurance Contributions. This in itself was not a wise thing to do given that it risked tying the new Chancellor’s hands and made the introduction of new taxes as increases to more economically damaging taxes much more likely. 

However, Labour has broken this election promise. At a recent Prime Minister’s Questions Rishi Sunak asked Sir Keir Starmer if the election promise also applied to Employers’ National Insurance Contributions. Starmer refused to give a straight answer and when Labour MPs have been pressed subsequently they have either not commented or claimed that Employers’ NICs are not a tax on working people as they are paid by businesses. 

While it is true that Employers’ NI is paid by businesses as it is Employers’ rather than Employee NICs (the clue is in the name), the incidence tends to fall on employees and so is very much a tax on workers. 

Employers’ National Insurance is a payroll tax and, like all payroll taxes, the burden is borne by workers. This is because although it is the employer who is responsible for actually paying the tax, they almost always pass any increase onto their workers. 

Any change to payroll taxes tends to predominantly impact wages. A comprehensive review of Employers’ NICs looking at evidence from a time span of over 35 years found that two thirds of Employers' NICs changes impacted wages. What is more, a further study looking at the impact of US payroll taxes found that up to 62 per cent of any increase would be passed onto workers. There are many other studies which show the impact that any increase to decrease to payroll taxes such as Employers’ NICs have on the wages of workers (former Head of Tax at Clifford Chance, Dan Neidle has a great thread on this) and the evidence is overwhelming: increasing Employers’ NICs will have a negative impact on the wages of employees. This does not necessarily mean that an increase will lead to a pay cut – but it does mean that they’re less likely to get a pay rise in the future – they’ll be poorer than they otherwise would have been.

While most of the evidence shows that the incidence of Employers’ NICs falls on workers in the form of the impact on wages, there is also evidence which shows that it also affects ordinary people as it is a job destroyer. For example, a study looking at the impact of Finland’s equivalent of the tax found that it reduced employment opportunities for low-skilled workers. Research analysing payroll taxes in Colombia found that any increase or decrease would have an impact on jobs. A further study in Sweden showed that changes to payroll taxes can have a particularly powerful impact on the job opportunities of young people. Therefore, it is clear that increases to Employers’ NICs is likely to have a detrimental impact on the career prospects of low-skilled and young people.

So far we have seen that the incidence of payroll taxes such as Employers’ NICs falls on workers in the form of lower wages or fewer job opportunities. It should be pointed out that not all studies show this. For example, a paper looking at the impact of an increase in payroll taxes in Virginia in the US found that small businesses are unlikely to pass the burden onto workers. So far so good, right?! Unfortunately it turns out that the cost is passed on to consumers in the form of higher prices. So, even if in the unlikely event that any increase to Employers’ NICs does not lead to a negative impact on wages and jobs, it would probably lead to an increase in the cost of your weekly shop. The government has ruled out increasing VAT in order to not further exacerbate the cost of living crisis for working people, but it might still end up doing just that if it goes ahead with increasing Employers’ NICs.

Anyway you look at it, Employers’ NICs is a tax on workers. Any increase will almost certainly have an impact on either wages, job opportunities, prices, or a combination of all three. It will be the most vulnerable and those in low skilled employment and the young who are already suffering and least able to protect themselves who will bear the heaviest burden as a result.

The government needs to start being honest with the public. The incidence of Employers’ NICs falls on employees and so any increase will be a breach of its Manifesto promises. Rather than breaking its promises and increasing taxes on working people this way then Labour should have used the Budget as an opportunity to be open with the public and introduce major reforms. It should drop the euphemisms and start referring to National Insurance Contributions as a tax. What is more, it should abolish the different rates and ultimately merge it with Income Tax.

Labour got itself in a bind during the Election when it promised it would not increase the three main taxes on working people. The Labour government has now broken this pledge to the British people. It can try and spin it but the simple truth is that any rise in Employers’ National Insurance Contributions is a tax increase on working people.

Thanks as ever for reading.