9 June 2009
Businesses say that the increase in National Insurance Contributions (NICs) will be the most damaging measure the Government is introducing from this year’s Budget. Over a third of businesses (36%) believe that the NICs increase will cause more damage to the UK economy than any of the other measures in the Budget according to our latest research.
From 2011 the amount of NIC paid by employers, will rise by 4% as a result of the rate change from the current 12.8% to 13.3% on any salary over the earnings threshold, currently set at £5,715 per year. This will increase the costs for businesses employing staff at almost every level. At the same time employees earning between £5,715 and £43,875 face paying an extra 4.5 % NIC as a result of their rate change from 11.0% to 11.5%, thus cutting into their take-home pay.
The looming increase in the costs for businesses to hire and retain staff will deter businesses from taking on staff as the economy begins to recover.
The next most damaging Budget initiative identified by businesses was the new 50% income tax rate for high earners, 24% of businesses believe that this will cause the most damage to the UK economy. Whilst the 50% tax rate has grabbed all the headlines the actual cost to the taxpayer is far outweighed by the increased NICs.
Whilst the 50% tax rate will rake in £1.8 billion in tax a year, the increase in NICs will cost employers and employees £4.8 billion per year.
20% of businesses think that the removal of pension tax relief for higher rate taxpayers will cause the most damage to the economy. These measures risk encouraging high earners to leave the UK for lower tax jurisdictions, putting London’s position as a leading financial capital at risk.
Roy Maugham, Tax Partner at our London office comments: “This year’s Budget has done very little to help businesses and will actually put them under increased pressure as the economy begins to recover. A 4% increase in NICs might sound like small beer, but will considerably add to the cost of taking on additional employees, whilst squeezing high earners will also put recovery at risk by encouraging wealth creators to leave the UK.”
“Whilst the 50% tax rate sparked greater debate, the NICs increase is viewed as more damaging as, not only will it cost the taxpayer £3 billion more per year, but it will also affect those on modest salaries as well as small and growing businesses who wish to expand as the economy returns to health.”
A fifth (20%) of businesses believe that the most damaging measure introduced by the chancellor is the increase in fuel duty rising by 2p in September and then by 1p every April until 2013. By 2012 this will net the treasury £3.6 billion. The price hike will affect all businesses, hitting hauliers and logistics companies particularly badly, with petrol prices already considered by many to be a burden.
Roy Maugham adds: “Overall the NIC changes and increase in fuel duty will directly or indirectly affect everyone. Whilst the pension and higher rate income tax provisions hit the headlines they affect very few and collect minimal amounts towards repaying the national debt.”
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