Richard Maitland, Head of National Employment Tax, MHA says –
- Companies to face a triple whammy of a rise in employer NICs, minimum wage and no cut in corporate tax this Parliament.
- MHA have calculated that average cost of employing someone on the minimum wage is up by 10%
- Very few levers for employers to pull to mitigate tax increases
- Company NIC increases ‘least worst option’
- Big rise in employment costs likely to deter corporates looking to invest in the UK
The Chancellor has announced a 1.2% increase in employers NICs and cut the threshold at which employers start paying the tax from £9,100 to £5,000. In conjunction with a 1.2 percentage point rise in National Insurance to take the employer rate to 15%, this will raise about £25bn a year.
After boxing themselves in on their election promises around no increase in income tax, NICs for employees and corporate tax the Government has had to find the money somewhere.
Whether you agree or not on whether this announcement breaches the manifesto pledge most UK companies won’t really care. What they are facing is a triple whammy of a rise in NICs, a significant jump in the statutory minimum wage (impacting some employers) and no prospect of a cut in corporate tax during this parliament.
Our calculations highlight that the costs for business of the average employee on the minimum wage have increased over 10% today.
Compounding this impact is that there are very few levers that employers can now pull to seek to mitigate these cost increases – although maximising the use of salary sacrifice may be one.
Offering some comfort for qualifying smaller businesses is the increase in the Employment Allowance, which will allow them to reduce their annual Employer NIC bill by £10,500, up from £5,000.
The news today follows hot on the heels of the government’s recently announced employment rights reforms which it has been estimated will cost businesses up to £5bn a year with the impact concentrated on low-paying sectors such as hospitality.
Clearly the Government will be hoping that the public will understand that the fiscal gap had to be filled somehow and as tax advisers we see why the NIC increase for business was chosen to do much of the heavy lifting in terms of revenue raising. It’s relatively easy to introduce and will probably be accepted by many as the least worst option.
But this big increase in the cost of employing people and creating new jobs sits uneasily with the laudable government focus on long term economic growth and is likely to give potential future investors concerns about coming to the UK.
Professor Joe Nellis, MHA’s economic adviser says –
Budget for growth?
This Budget is unlikely to stimulate economic growth in the short-term, given the scale of tax increases hitting the corporate sector.
But the economy was already showing modest signs of recovery, and we can expect to see growth heading towards 2% in 2025 – an improvement from the flatlining of recent years.
However, interest rates are likely to fall slower than previously expected as a result of this Budget, although we still expect to see another cut before the end of this year. The scale of public sector expenditure, increases in the minimum wage, and the likelihood that national insurance charges will lead to higher costs of employment, will put some upward pressure on prices.
There is also a danger that these changes in the private sector regarding national insurance and the minimum wage result in job losses, ultimately harming the ‘working people’ the Government had promised to set out to protect.
While the inflation peak of October 2022 was largely caused by external factors, and these have now calmed, inflationary pressures remain in the form of domestic wage growth. This Budget will have done nothing to alleviate these pressures and there is a risk of a continued wage-price spiral. This has been a concern of the Bank of England. As a result, the 2% inflation target is not likely to be met on a sustained basis for a few years.
Rachel Nutt, partner MHA says –
“The Entrepreneurial business owner has taken a real hit in today’s budget. Aside from the annual increase in Employers national Insurance, and the anticipated loss of the 10% capital gains tax rate on a sale of shares, Entrepreneurial Business owners need to radically rethink their exposure to Inheritance Tax post budget.
The 100% relief from IHT for all shares in trading companies that business owners have enjoyed has now halved for all businesses worth over £1m. Whilst the speech suggested this applied only to AIM shares, unlisted shares in your family-owned training companies also appear to be in scope.
Unless those shares are left to a spouse on death, an effective rate of 20% will now be payable on the entire share value of the businesses value above £1m on death. So a £30 million business could face a £5.8m unexpected tax bill it would be called on by the estate to help fund.
The unexpected passing of a key shareholder could now put significant pressure on the business to be able to fund their death taxes and maintain itself. I would urge business owners to reconsider their Wills, key man insurance policies, and shareholders agreements. The measure is set to come into effect from April 2026, so the window to plan is now.”
