October 17, 2024
 Aspiring lawyers should consider how significant increases in taxation in the upcoming Budget are likely to affect businesses (especially in certain sectors).

What is National Insurance?

It is useful, before going in depth on the potential changes in the upcoming budget, to first explain what National Insurance is and, broadly, to give a rough overview of how it works.

National Insurance is a form of taxation in the UK which primarily raises money for the welfare state (especially for state benefits). It was introduced in an Act of Parliament in 1911 but significantly expanded during the introduction of the Welfare State by Clement Attlee after World War Two. This is essentially an extra form of taxation alongside others such as income tax, VAT, Capital Gains Tax (also known as CGT), Stamp Duty, etc. Paying for National Insurance technically allows you to qualify for certain benefits and the state pension.

Generally, all UK employees will pay from the age of 16 up until they become eligible for a state pension (which currently stands at age 66, though is regularly reviewed). However, you are exempt from paying for National Insurance if your income falls below the Lower Earnings Limit (which currently sits at £242 per week – or, if self employed, £12,570 per year).

People falling under the Class 1 Contribution category (the majority of workers) will have their National Insurance automatically taken off their salaries by their employer (so will never actually see the money themselves, other than as an expense on their payslips).

For the current tax year (6th April 2024 to 5th April 2025), the rate stands at 8% for most people – though there are exceptions which can lower your rate (for example, widows with a ‘certificate of election’ can get a discount). 

For employers (rather than employees), there is a compulsory National insurance contribution of 13.8% on the earnings of their workers above £175 per week. 

All in all, National Insurance is an incredibly important income stream from the government’s perspective – often accounting for well over £100 billion and almost 20% of the total tax revenue (behind only income tax). 

What has been said about increasing National Insurance ahead of the budget?

The government’s Budget is due on 30th October from Chancellor Rachel Reeves, and will very likely contain some major shifts from the Labour government. Recently, the minister was highly vocal about the fact they had discovered a £22 billion ‘hole’ in the public finances.

The current rumour around Westminster is that the government are looking to increase the contributions that employers themselves are expected to make towards National Insurance. 

Labour’s pre-election pledges did, as many are now reminding them, include a promise not to increase National Insurance on ‘working people’. Reeves has stoked the fire of the rumours by clarifying that this was only referring to employees (not employers themselves). As such, it is likely that businesses will need to pay more.

When pressed about the issue in a recent BBC interview, PM Keir Starmer was reluctant to give a direct answer, but did concede that, while Labour is ‘pro-business’, in reference to growth, the upcoming Budget is also ‘going to be tough’, leading many to speculate that National Insurance contributions for employers will indeed be rising. 

It is worth noting at this point that there are very few actual numbers floating around for what that increase might look like (or, indeed, which form it might even take – there are many possibilities). Regardless, the bottom line appears to be higher NI taxation for employers. 

Furthermore, employers will be aware that changes to the taxation system can often happen very quickly through the digital payroll systems controlled by the government – if the announcement does come, it is unlikely to take too long before employer pockets are being drained

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What has the response to the rumours been?

The proposed rise has been met with widespread concern from employers. Lobbying group CBI said, on behalf of its 100,000+ members, that this will be a very controversial move, while Alex Veitch (director of policy at the British Chamber of Commerce) stated that this move would ‘simply hobble growth and lead to businesses having less money to invest in their staff’.  

There has also been widespread concern that there will be no distinctions drawn between large businesses and small, family-run affairs (with the latter reportedly feeling that the Labour pre-election promise on National Insurance tax increases suggested they would not be on the receiving end of any such hikes). 

Which industries will be particularly affected by a National Insurance increase?

Industries in which staff are the primary cost are obviously the most heavily affected, here. The most obvious in this area is hospitality. In a recent interview, Kate Nicholls (of UK Hospitality) said that the rise would ‘particularly hammer sectors like hospitality, where staffing costs are the biggest expense’. Areas with less staffing costs (such as ‘lean’ startups in areas which do not tend to be as labour-intensive, like tech) are less likely to be heavily affected, though the size of the business obviously plays a huge role too. 

How do lawyers fit into the story of National Insurance rises?

Aspiring lawyers, especially future solicitors applying for vacation schemes and training contracts, should be keen to follow this story. Very few headlines carry as much weight in as widespread a manner as the Budget each year, and this appears to be a potentially huge development.

One of the reasons this story is so important for showcasing your commercial awareness is that it does not just apply to huge international businesses which will be advised by your Magic Circle or elite US firms. It will also likely (as already discussed above) have a significant impact on local businesses, which in turn will be looking to high street solicitors for advice, too. In short, then, this story is likely to have widespread ramifications.

Naturally, in terms of practice area, tax lawyers are at the forefront here, since there are a number of technical considerations to be made. If changes are made to the system, working out how to implement them (especially in larger, more complex business models which might involve overseas entities, too) is just the first step. Lawyers and accountants will then need to sit down and think about how employers will respond to this, since they will likely have a few different options.

For example, some may choose to restrict wages as a result (essentially passing the National Insurance cost increase onto their employees). This would actually lower income tax as a result (thereby having the government ‘shoot themselves in the foot’, to some extent). Similarly, if businesses do foot the bill themselves, this would likely lower profits and therefore reduce the government’s income from corporation tax – as economists are warning, then, the outcome of this change could be quite unpredictable.

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