Directory Image
This website uses cookies to improve user experience. By using our website you consent to all cookies in accordance with our Privacy Policy.

Could Lower NI Contributions Boost the UK Economy?

Author: Anna Preston
by Anna Preston
Posted: Jun 10, 2016
Employer's National Insurance contributions will be abolished for people under 21 next year. But could a reduction for everyone have had a greater effect on boosting the UK economy?

National Insurance (NI) Contributions have always been a difficult issue for small businesses that employ staff because they must be paid by the employer in addition to the salary: a bit like a tax on employing people. For anyone earning over a minimum threshold (which varies annually) any business will be required to pay 13.8% of the employee's gross salary to HM Revenue & Customs (HMRC) to cover this contribution, making the cost to the employer significantly higher than just the salary.

An economic recovery may technically be underway in the UK but for many businesses that have been suffering difficult economic times over the past 6 years the NI charge could be a deterrent to small businesses taking on new staff. Potential employees will expect salaries at the going rate so the cost to the business could be prohibitive; effectively putting the brakes on growth within small businesses and, of course, the wider economy with the knock-on effect of limiting the number of jobs available to those seeking work.

A vibrant jobs market: the ability to find well-paid employment easily and to retain a job is essential to economic recovery and future success and many small businesses are actually thriving in the current economic downturn and would consider employing more people if they could reduce the costs of doing so. This would boost the economy because of the production of more goods or provision of more services as well as individuals earning enough to go out and spend on products and services. Of course, it would also reduce the cost of paying benefits to the unemployed.

But how can small businesses employ people at an acceptable salary without incurring additional costs such as Employer's National Insurance Contributions?

There is a strong economic argument for significantly reducing Employer's NICs and thereby encouraging businesses to take on more staff. The UK treasury will still benefit overall because they will be receiving more tax and Employee's NI contributions if more people are in work. As well as receiving more Value-Added-Tax (VAT) on the more goods purchased by employed people with disposable income.

In December 2013, George Osborne, the Chancellor of the Exchequer, decided that employer NICs will be abolished for workers under the age of 21 from April 2015 (subject to parliamentary approval) on earnings up to the upper earnings limit. This may certainly encourage employers to employee young people in preference to those over 21 but did it go far enough? A reduction of the charge from it's current 13.8% for all employees would have a more significant effect on the jobs market, especially where skilled workers are required, who are unlikely to be under 21.

That's not to say the Chancellor's Autumn Statement in December was entirely without benefits for small businesses. For instance, the small business rate relief is being doubled, business rates are being capped and can now be paid in instalments, and for businesses moving into vacant premises there will be the advantage of a halving of the rate due.

Nevertheless, many accountants and tax advisors believe it would have been encouraging to see a reduction of National Insurance contributions for all employees, regardless of age. The individual employee also makes a NI contribution in addition to income tax, and this is usually collected via a Pay-As-You-Earn system which deducts the tax and NIC at source. So National Insurance Contributions would still be paid to the UK Treasury both by the employee.

About the Author

The author has written and published articles on a wide range of topics including Small Business Advice, Tax and Accounting, Interior Design, House Renovation and Project Management.

Rate this Article
Leave a Comment
Author Thumbnail
I Agree:
Comment 
Pictures
Author: Anna Preston
Premium Member

Anna Preston

Member since: Apr 29, 2015
Published articles: 180

Related Articles