Stuart Gentle Publisher at Onrec

Why the NI tax rises are a kick in the teeth for small businesses and lower earners

There has been a strong reaction to the national insurance tax rises announced last week and I’m not surprised - it will hit small businesses and lower earners disproportionately and could stall jobs growth just as it is soaring (WaveTrackR data showed jobs to have increased for the fourth consecutive month in August).

The governments own impact assessment has backed this up, finding that the rises could be devastating for families and jobs, deterring businesses from hiring new staff. Is extra funding needed in the social care sector? Unequivocally yes. Is this the way to do it? In my opinion, no.

The social care sector has been struggling for decades, squeezed by an ageing population, inadequate funding and a high employee turnover. And the funding gap will only widen with time. Something clearly needed to be done but the government’s confirmed rise in national insurance - an increase of 1.25% for employees, sole traders and employers - as a measure to fund social care doesn’t feel right to me. What I am struggling to get my head around is why national insurance was chosen over general taxation. I accept that we need to find ways to pay for the rising cost of social care but how can it be right to do so by penalising lower earners and small businesses?

For a start, it’s not what NI was established for. NI was introduced as a financial safety blanket in circumstances whereby people are unexpectedly unable to work. Both employees and employers contribute to NI to keep workers afloat in hard times, not to boost funding for state services. And what a time to do this, just as individuals and small businesses are emerging from the wreck of COVID and beginning to rebuild. Just as those businesses are starting to hire again, helping the economy as a whole to recover. This increase in NI contributions will mean that many will be forced to reconsider hiring new employees as the cost of that hire will be higher. As certain industries in particular are raising salaries to attract candidates, the rising cost of hiring is already a concern of many businesses.

What is particularly jarring is that this is a tax that will hit younger and lower paid workers hardest whilst older retirees - from a generation that were able to afford to buy houses and save money for their retirement, who are also more likely to immediately benefit from social care - will not be contributing in the same way. As many have said, this seems to be an incredibly unfair way of paying for social care. Would an increase in income tax not have been fairer? That way it would be a tax on profits rather than activity and would mean that big businesses and the super rich would pay more. Taxation would be on a sliding scale rather than disproportionately heaping the burden on those who can afford it the least. On a side (but very much related) note, if the government cracked down more on international conglomerates and multi-billionaires that employ a multitude of tax loopholes to avoid paying the tax they should be, we could quite easily raise adequate funding. The focus always seems to be in the wrong areas of society.     

The current jobs growth - which WaveTrackR found in August reached a year-high of 327% over the 2020 monthly average - is a fantastic sign that the economy is strengthening. Increase NI contributions across the board and that is put in jeopardy. The taxation may not come into effect until April 2022 but full economic recovery - not just to pre-pandemic levels but to where we should be if normal growth had been able to take place - could take years. What we don’t need is a tax on jobs, which this effectively is.

The social care sector desperately needs to fill the funding gap if it is to avoid collapse and this tax is estimated to raise between £12bn and £14.5bn a year. The issue isn’t if funding needs to be raised, it’s whether using national insurance to do it is fair and sensible. In my opinion, it is not.