Monday, April 12, 2010

Election tax tease: National Insurance - The 'tax on jobs'

George Osborne and the Conservative Party have pledged to reverse a planned rise in National Insurance Contributions (NICs). This has been welcomed by business leaders and has been criticised by Labour as putting the recovery at risk.

The so called 'tax on jobs' refers to Employers' NICs. It's the tax payable by employers by reference to their workers', employees' and directors' salaries. The current tax is 12.8% and Labour have announced two 0.5% rises which are both due to take effect from April 2011 when the tax will increase to 13.8%. Incidentally, 30 years ago, in 1980, the rate was 13.7%.

It is the aggregate 1% rise in the tax that the Tories have pledged to reverse and this announcement has been welcomed by a wide range of business leaders.

Labour's plans also affect the NICs payable by the self employed and by all employees. A 0.5% rise was announced in 2008 and a further 0.5% rise was announced in 2009. The aggregate 1% rise was to take effect from April 2011. This increase too would be cancelled under Tory plans.

Those who disagree with the Tories' plan focus on the need to fund the 'tax cut'. The tax due to be raised by the 1% increase in employers' NICs is c£4.5bn pa. The Treasury estimate that the total cost of this proposal is £7bn pa. You won't find that figure in the 2010 Budget 'red book' however, as, in an effort to fool everyone, the increase in NI was contained in two separate announcements and therefore the impact and the money to be raised are in separate tables (A2 and A11). £7bn is approx the aggregate of the relevant figures in those tables. Meanwhile Peter Mandelson is claiming the cost will be £30bn. If that were the case then surely the tables should show £30bn as the tax to be raised by the increase!

The Tories say that the related adjustments mean that the total cost of their NI proposals would only be £5.6bn pa, falling to £4bn over time. In isolation it's clearly a lot of money. But it's a small fraction of the forecast deficit of £167bn in 2011. And Labour have been just as evasive as regards how this is to be cut significantly as have the Tories. As such it is hard to see any justification in arguing that this £7bn alone will "put the recovery at risk" and lead to deeper public spending cuts.

What do you think?

I wrote a related piece yesterday titled: "Election tax tease: National Insurance and Income Tax alignment."


  1. It's a tricky one, because, the neither party has (to my mind) a clear-cut, common sense view of the recession - and never has had. But then they certainly wouldn't share mine, because they're on the other end of the stick!

    Politics aside, I heard whisperings that the Tories may well be planning to increase the VAT rate to fund some of their plans - in which case the 1% "Employment Tax" rise is somewhat irrelevant.

    While notionally increasing VAT has no effect on business profits (as it's passed on directly), of course it does, as it increases consumer prices - most likely resulting in a drop in turnover.

    Anyway! Back to the plot. It's interesting to note that the rate was 13.8% in 1980, actually - although that doesn't automatically suggest we should put it back to that level (since you'd have to evaluate all the other factors (e.g payable income tax on earnings of X and so on).

    It's the "random", "complex" taxes which annoy me more. For example taxing products which are deemed to cause social problems, rather than adjusting and enforcing existing legislation to deal with the problems and their root causes!

  2. Any increase at this moment in time is bad for business and does not help the job market.

    One should remember that the largest employer in this country is small business. They can hardly afford it along with other tax increases.