Social care levy has potential to stifle growth, experts warn
Tax and business advisory experts have raised concerns over the UK government’s plans to raise national insurance contributions (NICs), arguing that the added strain on businesses could bear significant knock-on implications for the wider economy.
Dubbed as a ‘social care levy’, the proposed hike will see the National Insurance tax rise by 1.25 percentage points for workers and employees, as the government attempts to raise an additional £12bn per year in public funding for health and social care. This is due to take effect from April 2022.
“The cost of employing someone is effectively going up by two and a half percent, because both employers and employees will pay this new levy. So, employers will then have to make a decision about what they’re going to do with that additional cost,” says Mark Pattenden, private client partner at haysmacintyre.
He goes on to argue that this presents businesses with three options for mitigating the effects of the rise: absorb it themselves and reduce profits, pay staff less, or pass the costs on to the consumer.
“That could end up being inflationary because prices will rise. And that then has its own problems, particularly surrounding the logistical issues in supply chains that we’ve already seen over the summer.
“It certainly has the potential to suppress economic growth.”
Pattenden also notes the potential inequality of the rises, with lower earners paying a disproportionately high level of NICs as a percentage of their salary.
Currently, UK workers pay 12 percent of National Insurance taxes on earnings between £9,564 and £50,268. Anything above this threshold, however, attracts a rate of just two percent.
Therefore, he argues, younger workers are more likely to be adversely affected by any NI tax increase.
What’s more, the rises mean that the total tax burden in the UK now stands at record peacetime levels. With much of corporate Britain still reeling from the effects of the pandemic, the timing of the proposals has therefore also been widely questioned.
“There are widespread concerns that these measures could potentially stifle jobs growth, pushing up payroll costs just as Mr Sunak’s furlough scheme comes to an end,” said David Shearer, tax specialist at Old Mill.
“Whilst we welcome the fact that this government is seeking to tackle much-needed social care challenges, there will be inevitable concerns about the timing and potential impact on many businesses.”
Shearer also denounces the other key element of the proposals: an adjacent 1.25 percentage rise on company dividends to ensure that the self-employed cannot avoid the levy.
“The new tax on dividends is yet another kick in the teeth for small company directors. This group of sole traders and owner-managers running incorporated firms were overlooked during the pandemic in terms of access to support, and this adds in another unforeseen challenge as they try to get back on track.”
In addition to being ineligible for the government support schemes, research has shown that the self-employed were also disproportionately hamstrung by coronavirus.
According to a 2020 report by the Enterprise Research Centre, 22 percent (1.1 million) of the UK’s self-employed population is in sectors most at risk of “loss of livelihood” in the current climate.
At the time of publishing, the report also predicted that if the crisis were to worsen and the loss of livelihood were to become permanent, this would wipe out “all of the growth” in self-employment activity seen in the UK since the 2008 financial crash.
Pattenden also acknowledges the challenge of the dividend tax rise, branding the measure as “unfair”.
“This levy effectively comes in two tranches. It’s being billed as a National Insurance increase, which to some extent it is because that’s how it’s addressed for employers and employees, but the dividend element of it is effectively an income tax rise,” he says.
“It’s particularly unfair on those people who are freelancing or contracting [and] didn’t qualify for pandemic relief, which didn’t apply to dividend income. These people have suffered through the pandemic, had no support, and are now seeing a tax increase.”
But Pattenden concludes with a slightly more positive outlook, noting the benefit of the measures being announced seven months in advance.
“As with any change in taxation, the earlier it’s announced, the more opportunities there are for planning.
“For example, our clients may want to pay dividends in the current tax year so the levy doesn’t apply. So, we may see a glut of dividends being paid in February and March 2022.”