It’s official:
Britain is now out of the recession. We’re all celebrating, right? Surely life can go back to how it was a couple of years ago.
Jobs will be plentiful, businesses will suddenly turn from loss-making to profit-generating, and bankers can get their bonuses in peace without the rest of the country interfering.
You might have noticed that the above isn’t happening. Yes, the economy grew that vital 0.3%, but businesses are still suffering losses. There are far fewer jobs then there were three years ago, with more
graduates searching and more qualified people with nowhere to go. And if the tabloids are anything to go by, we all still perturbed that bankers are getting their bonuses.
I could write a dissertation on the above with twenty pages of footnotes, but rather than covering old ground, I thought I’d take a look at an issue that has not got quite as much attention as it might have done if there hadn’t been quite so many changes to Income Tax:
The National Insurance Contribution (NIC) increase from 2011.
In the
Pre-Budget report it was announced that NIC contributions would increase by 0.5% from 2011. Since then, this has increased by a further 0.5%. The effects of this increase are that employees will now be paying 12% on main rates and employers will now be paying 13.8%.
This means that employees will be taking home a lower net pay, and employers will have a larger monthly payroll expense. According to the
Treasury, this will raise an extra £5.1 billion to go towards deflating national debt.
The Chancellor has indicated certain concessions to counteract the negative impact that the increase will have. It has been suggested that no one earning less then £20,000 per annum will be worse off from NIC in 2011/12. This means increasing the rates bands and the primary threshold (currently at £844 per week) by £570 per week. Whether this will head off early complaints that once again lower income earners will take the fall that greeted the abolition of the 10% Income Tax band is yet to be seen.
The questions that are raised by the increase are as follows:
- Is there any way for employees to protect themselves against the NIC increase?
- How has the increase been viewed in the commercial world?
- What other options could have been adopted?
Anyone who in 2009/10 earned £95 per week, or £4,940 per annum will suffer NIC on their wage (i.e. you only paid NIC once you earned £95 in a week). The first item of significance here is that unlike income tax, NIC is calculated on weekly earnings and therefore even if you are under the annual threshold, you may end up paying NIC if in any one week you earn above £95 (£97 from April 2010 onwards). The second is that the NIC threshold is significantly lower then the Income Tax threshold. There have been plans to align NIC with Income Tax but these were disturbed with the abolition of the 10% starting Income Tax rate band.
As mentioned, the Chancellor has hinted at his intention to align the Upper Earnings Limit for NICs with the Higher Rate Threshold for Income Tax – we can but wait. So for those of you earning above £20,000 per annum there is a way to protect yourself. For any employee who receives a pension contribution it is possible for both the employee and employer to reduce their liability.
Whilst employee contributions to pensions are subject to both theirs and their employers’ NICs, employer’s pension contributions are not. One way to counteract the NIC rise is for the employee to forgo part of their salary and in return the employer increases their pension contribution by the amount of salary relinquished. This will save NIC for both employee and employer. The obvious downside is that a lower amount of actual cash will be taken home every month, which for many is a big issue. Of course, the other issue is that if your employer does not contribute towards a pension for you, you’re pretty stuffed. However, you may wish to take this opportunity of highlighting the advantages to your employer of them contributing to a pension.
So how has the NIC increase been viewed by the commercial world? Most commercial players have realised that in these times we need to curb public spending and at the same time reduce some of the country’s debt. This is by no means an easy feat, and most agree taxes will have to be raised. However, was raising NIC the best way to do this?
One of the biggest pressures for businesses currently is cash flow. Whether it is decreased sales, uncertainty of bank lending or harsher credit periods from suppliers, cash is in shorter supply then before. Increasing NIC means that their monthly cash expense increases, putting even more pressure cash flow. The effects are fewer staff being taken on, job cuts and the inability to pay debts. In my humble opinion this is not the best way to help the economy to recover!
The British Chamber of Commerce (BCC) has also said as much.
The biggest issue for the economy is the effect it will have on job creation.
Ashley Almanza, Finance Director of BG, suggested as much, adding,
“…the cost competitiveness of the UK will suffer as a result of the rising total tax rate.” Equally, increasing NIC may scare away foreign business. If having a factory here means going along with Corporation Tax, VAT, and a business has a high payroll, companies could look to open up branches in other countries and this could have a very negative effect on the economy.
The question remains: are there any other options open to the Treasury? They have already increased Income Tax by more then they originally planned, and although it is still possible to raise more monies here, it is unlikely to occur with an election looming. Any significant increases on Corporation Tax would cause similar problems to those mentioned above. That leaves a VAT increase, which is what the BCC suggested. In fact, according to the BCC, just a 1% rise in VAT will raise £4.5 billion.
Arguments for raising VAT rather then NIC in my opinion are thus: Our VAT rate is currently much lower then most of Europe’s and therefore will not have such a negative effect from a national point of view. The other is perhaps a bit more controversial. NIC and VAT are two very different types of tax: one is on a purchase and the other is on earnings. I can understand that the government wants to ensure the economy continues to grow, but surely it’s about time that those of us earning were cut a bit of slack and given a chance to have a bit of money to play with – and dare I say it – even save some. It seems fairer that those who are willing to spend their money suffer the tax on it.
In my view there are no advantages to increasing NIC; it will slow job creation and growth. In the long run it is likely to have a negative effect on the nation’s current deficit. Businesses and middle income earners need a break and a chance to recover. If the Chancellor is brave, he will listen to the commercial world and back down. We can but hope.
Kim Grossman attended the University of Birmingham and graduated with a 2:1 LLB with Honours. She then completed the LPC at the College of Law, before working as a paralegal for nine months.
She currently works for Landau Morley LLP Chartered Accountants and Tax Advisers. She is part-qualified with the ICAEW and will take her three finals this summer.