How will employers handle higher national insurance contributions?

We all benefit from improved healthcare and education, not least employers who gain directly from a healthy and educated workforce. The International Monetary Fund (IMF) has already said it supports the Chancellor’s measures for “sustainably raising revenue”.  

Relative to the overall corporate tax take, the scale of increases are modest and it’s also not the first time that similar changes have been considered. Boris Johnson raised contributions by 1.25 percentage points, not just for employers but also employees. This was intended to help fund social care, but the increase was cancelled by Liz Truss. 

How employers might manage increased national insurance costs

So in the context of a historic living standards squeeze for working people, employers are being asked to make a bigger contribution to public finances. They will of course have a range of options on how they can cover these increases. They can absorb the costs and many will choose this option. They could also raise productivity by investing in their business, raise the prices they charge customers, or seek to suppress wage growth in their organisation. It can be difficult to predict what balance of these approaches employers will opt for and it will vary greatly between firms and industries. 

Impact on wages: could higher NI contributions affect worker pay?

Workers will be particularly interested in the extent to which employers seek to shift the burden onto them by holding down wages. One thing is for certain – there is no automatic link between business tax and worker wages. 

Did companies hand out bumper pay rises alongside falling corporation tax? Instead, how the costs are shared will depend on the growth trajectory of the business and economy and on the bargaining power of workers. 

Worker protections: National Living Wage and the Employment Rights Bill

Important protection for workers will come from the wage floor. The National Living Wage is set to rise by 6.7 per cent to £12.21. The rate for 18-20 year olds increases by over 16 per cent to £10. This comes after the Labour government asked the independent Low Pay Commission to consider the cost of living in their calculations and work towards abolishing discriminatory age bands. 

The Employment Rights Bill also paves the way for a wider rebalancing of employment relationships. The plan to make work pay includes measures to improve trade union access to workplaces, simplify the process for union recognition and make rules for union votes fairer. All of this will strengthen the bargaining power of workers. 

Insights from the past: how employers reacted to higher minimum wages

When predicting how employers will respond there are also some clues from previous changes. The independent Low Pay Commission monitors employer responses to increases in the minimum wage. This week it has published evidence which shows that most employers absorb higher costs without impacts on pay growth.  

The LPC refers to a regular CIPD survey of employers which found that about 30 per cent of employers chose to absorb the costs, 30 per cent raised prices, a quarter raised productivity and just 1 in 10 looked to reduced pay growth. The LPC also refers to similar results which can be found in employer surveys run by the CBI and FSB. 

Why higher employer contributions are sustainable and beneficial

Employers stand to see substantial gains from improved public services, and have a range of options for how they cover increases in national insurance contributions. The evidence shows they are more likely to absorb the increased contributions than shift the burden to their staff, and that this can be afforded: the net profit rate for private companies in the UK is 9.6 per cent, and it rises to 15.2 per cent in the service sector. While of course there will be some who seek to recoup costs from their wage bills, the National Living Wage and the employment rights bill will provide important protections.  

An automatic link between higher employers’ national insurance than wages is far from pre-determined - and the revenues raised will deliver urgently needed public service gains that will benefit us all.