A rise in employer national insurance contributions (NIC) could prove to be the “straw that breaks the camel’s back” for some businesses, a former head of the National Audit Office has warned. Crossbench peer Lord Morse cautioned the House of Lords that the Government has failed to account for the “differential damage” the policy could inflict on various industries and regions across the UK.
The NIC hike, announced by Chancellor Rachel Reeves in the autumn budget, is aimed at raising £25 billion annually. However, critics argue the move disproportionately impacts sectors and businesses with high payroll costs, potentially exacerbating financial strain during already challenging economic conditions.
Impact on businesses
Speaking in the Lords on Monday, Lord Morse highlighted how the rise in NIC is disconnected from a company’s profitability. “Employer national insurance has no direct relationship to that employer’s profitability, and thus to that employer’s ability to pay more tax,” he said.
He pointed out that businesses in industries with high payroll costs, such as construction, could be disproportionately affected. These businesses often operate on slim profit margins and may struggle to absorb the additional costs.
“If a business has a very substantial turnover, but relatively low margins, such as a lot of the major construction contractors, its ability to pay more national insurance may be much less than it would be in another more profitable sector,” Lord Morse explained.
He further emphasised that not all large businesses are equally equipped to handle the increased burden, countering the Government’s rhetoric about “broad shoulders” in the corporate sector. “Some big businesses may find the additional NIC charge very much more damaging than others. It may even be the final straw that breaks the camel’s back, in some cases,” he warned.
Regional disparities
Lord Morse also raised concerns about the geographical impact of the NIC hike, noting that certain regions could be disproportionately affected based on the nature of their local economies. He said, “If a high proportion of local business activity happens to be in a high payroll model of business, this means that the local economy is likely to be disproportionately impacted.”
Citing Northern Ireland as an example, he suggested that the Government had not adequately considered how different regions could bear the brunt of the policy. “It’s not rocket science,” Lord Morse said, adding, “I’m not sure that HM Government has considered these points of differential damage. If not, they should do so.”
Concerns from northern Ireland
The debate was brought to the chamber by DUP peer Lord Morrow, who criticised the Government for failing to account for the specific challenges faced by Northern Ireland. He warned of the “disproportionately negative impact” the NIC increase and the removal of agricultural property relief would have on the region.
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Lord Morrow stated, “The Government’s plans are detrimental in many ways, but not least the reality that many businesses will be simply unable to absorb the increased cost of national insurance contributions or the inflation-busting wage increases. The bill still has to be paid, and this will be shifted onto the consumer.”
He highlighted the agricultural sector as particularly vulnerable, noting that the rise in NIC from 13.8% to 15% would create significant hardships. “In Northern Ireland, the rise in the rate of national insurance contributions will hit our agricultural sector hard,” Lord Morrow said.
A call for reassessment
Both Lord Morse and Lord Morrow called on the Government to reassess its approach to employer NIC increases, urging ministers to consider the broader economic and regional consequences.
Lord Morse stressed the importance of evaluating the policy’s impact on different industries and regions before its implementation, warning that a one-size-fits-all approach could lead to unintended consequences.
As businesses brace for the financial implications of the NIC hike, pressure is mounting on the Government to provide more targeted support to vulnerable sectors and regions. Whether these concerns will lead to adjustments in the policy remains to be seen, but the debate has underscored the complex economic landscape facing businesses across the UK.
