British employers have warned that a rise in employer national insurance contributions in the budget could hit hiring and limit pay rises, hurting businesses including pubs, hotels and restaurants.
Keir Starmer and the chancellor, Rachel Reeves, have refused to rule out a rise in employer contributions in the budget on 30 October, as part of plans to plug what the government says is a £22bn hole in the public finances left by the previous Conservative government.
The head of UK Hospitality, which represents bars, pubs, restaurants and hotels, said such a move would be a tax on jobs.
“An increase would particularly hammer sectors like hospitality, where staffing costs are the biggest business expense,” said Kate Nicholls, the group’s chief executive.
“Hospitality businesses are much less able to stomach yet another cost increase, when they’re already managing increases in other areas like wages, food, drink and energy.”
Starmer twice refused on Tuesday to rule out a rise in employers’ national insurance contributions in the budget, stressing Labour’s manifesto promise was that it would not raise taxes on working people.
His words came as the chancellor, Rachel Reeves, gave a strong hint on Monday that the rise was in her sights at the end of October, suggesting that executives would understand the need for such decisions.
Speaking to the BBC in Downing Street, the prime minister said Labour was “very clear in the manifesto that we wouldn’t be increasing tax on working people”, citing income tax and national insurance. “It wasn’t just the manifesto. We said it repeatedly in the campaign, and we intend to keep the promises that we made in our manifesto.
“It’s going to be a budget that’s going to be tough, of course, but the focus will be on rebuilding our country and ensuring that we get the growth we need in our economy. And so it’s consistent with the [investment] summit we had yesterday, and this money that is now coming in, which will be real gamechanger.”
Paul Johnson, the head of the Institute for Fiscal Studies, told Times Radio on Monday that an increase in employer national insurance contributions would count as a “straightforward breach” of the manifesto. “I went back and read the manifesto and it says very clearly, we will not raise rates of national insurance,” he said.
The potential measure was also criticised by the head of the Confederation of British Industry, Rain Newton-Smith, who told BBC Radio 4’s Today programme that it could make it “harder for businesses to create the jobs and the growth” to fund public services.
The British Chambers of Commerce, which mainly represents small and medium-sized businesses, is also concerned. Companies are already facing higher costs from the new government’s planned employment reforms, according to Jane Gratton, its deputy director of public policy.
Introducing national insurance on employer pension contributions could raise as much as £17bn a year for the exchequer, while putting up regular employer national insurance by 1p would raise about £8.5bn.
Government figures published on Tuesday showed some signs of a weakening in Britain’s jobs market, with pay growth slowing.
Rob Morgan, the chief investment analyst at the wealth manager Charles Stanley, said a rise in employers’ contributions could lead to wage rises being curtailed as bosses attempt to limit the impact of paying higher staff costs.
He said: “With inflation still not entirely snuffed out this could ramp up the cost-of-living pressures on working families.
“However, the effects are not clear cut. Employers consider the total cost of an employee, which includes employer NICs and pension contributions. If these were to increase it could lead to businesses restricting new hires, limiting pay rises or scaling back pension payments. Yet some may instead look to pass these costs on in terms of higher prices.”
Tom Selby, the director of public policy at the pensions company AJ Bell, said: “Politically, this would also be less risky as it wouldn’t hit voters directly in the pocket – although there is a danger employers will scale back remuneration, including pensions.”
Reeves and Keir Starmer promised voters before July’s election that they would not increase the main rates of tax on working people, specifically income tax, value-added tax and national insurance.
Conservatives argue that an increase in employer national insurance contributions would amount to breaking a manifesto pledge.
Mervyn King, former governor of the Bank of England, said Reeves should ignore Labour’s “irresponsible” manifesto pledge and raise national insurance for workers in the budget.
In an article for the Independent, Lord King said it was “reckless” for the Tories to cut national insurance before the general election, and that both main parties were “irresponsible” when they said they would not reverse those cuts and that it would be best for the government to put it back up.
