Make no mistake – if Reeves hikes ‘employer’ national insurance, it IS a tax on working people

The chancellor will likely sell her widely expected Budget measure as a way to raise funds while protecting workers – and without breaking the letter of Labour’s manifesto pledges. But in reality, says James Moore, it is the ultimate stealth tax

Ahead of her first-ever Budget, speculation is mounting that chancellor Rachel Reeves will hike up employer national insurance contributions. At first glance, this may seem as though Labour is keeping its pre-election promise to not clobber “working people” – but make no mistake: this plan very much will impact hard-working folk.

Employer NICs are often referred to as a “jobs tax” – and with good reason. You see, when you increase them, you make it more expensive for businesses to hire people, and there are two ways employers tend to address this: firstly, by cutting the number of people on payroll (be that via redundancy or by creating fewer positions); secondly, by paying workers less to balance out their losses.

“Working people” might not see a direct impact if they look at the national insurance section on their post-Budget payslips, but that doesn’t mean it won’t hurt them down the line. This is perhaps the ultimate stealth tax – and no one seems to be calling Labour out on it.

The party manifesto might not have specified employer national insurance would be protected – but it did outline that it would safeguard employees. And to me, this is a clear breach of that promise.

Now, Reeves would argue – as, indeed, she has on numerous occasions – that she is facing a fiscal black hole of £22bn, caused by her Tory predecessors. So it would make sense, in her eyes (and Keir Starmer’s, for that matter), to plug that gaping hole by taxing those whose “shoulders are broadest”.

The trouble is, there are limits to how much you can raise by doing this.

Rich people tend to be highly mobile and have the resources to pay for batteries of advisors, with the aim of limiting what they pay – plus there aren’t many of them. To generate the amount Reeves needs to fix the problem, she will likely have to move beyond the 1 per cent.

“Better to do this than to raise a complex array of other taxes,” tweeted Paul Johnson, the head of the Institute for Fiscal Studies. He also pointed out that, while this may hit a lot of people, pensioners – whom, you could argue, have already surrendered their winter fuel payment thanks to Reeves – are in the clear. So are those fortunate enough to be able to live off their investment income.

How much does the Exchequer stand to make through this?

“If employer NICs were fully passed through to the wages of the employee whose earnings were being taxed, we estimate that a one percentage point increase in the rate of employer NICs (from 13.8 per cent to 14.8 per cent) would raise around £4.5bn a year,” says IFS senior economist, Stuart Adam.

However, he conceded that, over the short term, it will be higher than that – although perhaps not as much as the £8.5bn suggested by the HM Revenue and Customs ready reckoner.

Needless to say, the timing is far from ideal. The latest Office for National Statistics labour market update shows that the number of job vacancies fell by 34,000 between July and September. This is the 27th consecutive quarterly decline – and is 36 per cent below the peak recorded in May 2022.

Wage rises also moderated to 4.9 per cent excluding bonuses, 3.8 per cent if they are included. The latter is lower because last year’s figures were boosted by one-off NHS and civil service payments. The number of payrolled employees in August 2024 fell by 35,000 and the provisional estimate for September 2024 was a further drop of 15,000.

By historic standards, Britain’s labour market is still in robust health. Unemployment at 4 per cent is very low; the number of vacancies still outstrips the pre-Covid peak. Labour shortages remain a problem in many areas. But the trend is moving in the wrong direction – and a raid on employer NICs could very well exacerbate that.

That said, every cloud has a silver lining. One of the Bank of England’s key worries has been the pace at which wages have been rising. Pay rises are closely linked to increases in the cost of services, which creates a problem for service-based economies like Britain’s. The most recent inflation rate (for the year to August) came in at 2.2 per cent, unchanged. Service prices, however, jumped by 5.6 per cent compared with a year earlier. The corresponding figure for July was 5.2 per cent.

If the IFS is right and it squeezes wages, a move on employer NICs should increase the Bank’s confidence that it can keep inflation steady while cutting rates at its next meeting, and perhaps again after that – good news for borrowers who’ve been under the cosh for quite some time.