National Insurance: a taxing question

National Insurance contributions can prove to be a constraining factor for manufacturers

The Autumn Statement in 2011 primed industry for details on ‘above the line’ R&D tax relief and the introduction of the Patent Box, due in the Budget in late March 2012. These tax adjustments are designed to help industry grow in the UK, but do they side-step a much more direct route to economic recovery and the reduction of unemployment? TM investigates the constraining effects of employer National Insurance contributions.

National Insurance is the second largest tax in the UK, exceeded in the revenues it brings to government only by Income Tax. In the year to March 2011, National Insurance contributions from employees and employers totalled a stonking £99 billion.

Given how lucrative National Insurance is for government, and how heavily the UK now relies on government spending, it is unsurprising that past calls for reductions or exemptions to the tax have been batted aside without serious consideration – government spending now accounts for around 50% of the UK economy.

But as British unemployment soars alongside expectations for a private sector-led recovery, is it time to take a closer look at the potential benefits and feasibility of altering some aspects of National Insurance?

International position

Speaking with David Jervis, partner at the law firm Eversheds, it seems that there is a significant will to do so on the part of industry. “I am aware of a groundswell of opinion that revisiting the level of employer contributions, or considering some exemptions for the contributions due for new employees, would be a means of removing an impediment to growth,” he comments.

David Jervis, Parter, Eversheds
David Jervis, Parter, Eversheds

“I am aware of a groundswell of opinion that revisiting the level of employer contributions, or considering some exemptions for the contributions due for new employees, would be a means of removing an impediment to growth” – David Jervis, Partner, Eversheds

Employer contributions for National Insurance now stand at 13.8%. Alongside other employer costs this is forming a significant deterrent to job retention and creation in many quarters claims Mr Jervis: “The problem is particularly acute for SMEs, but even our corporate clients cite concerns. For corporate firms these concerns are often cited alongside the 50 per cent tax rate. I have seen the UK avoided by firms looking to place certain aspects of their operations which are flexible as to location.”

Jonathon Duck, CEO of flooring manufacturer, Amtico has been bitten by this perception of the UK as a high tax jurisdiction in the past and has some clear cut views on the actions which should be taken by government to keep top talent in the UK and encourage employment growth.

“The week the 50 per cent income tax rate came in half my board moved overseas. I’m not a hedge fund. I am a bog-standard plastics processor, but if you make it difficult to have top jobs in the UK then they will leave and invariably they will drag the next level of jobs with them.”

And difficulties posed by National insurance, in addition to high income tax rates, are considerable. It’s not just about salary. Employee benefits like company cars are also subject to employer National Insurance contributions, though at a lower rate and, according to Jervis, this can lead to cat and mouse negotiations around top jobs as employers seek to arrange salary sacrifices in exchange for a range of lower tax employee benefits.

Duck is frustrated. “Keeping employer National Insurance contributions high is an incredibly stupid thing to do if you are trying to build employment and economic health,” he states. “Once the top and middle jobs go abroad, the avalanche loss of ‘normal’ jobs is inevitable.

“This doesn’t impact parts of the service sector so heavily since your restaurant waiter must be in the UK in order to serve you and you can’t import a haircut,” continues Duck. “But high NI actively undermines manufacturing in the UK, both for companies exporting and for those wanting to provide locally manufactured substitutes to imports. Current policy is violently antimanufacturing and internationally uncompetitive.”

“Keeping employer National Insurance contributions high is an incredibly stupid thing to do if you are trying to build employment and economic health” – Jonathan Duck, MD, Amtico

Jonathan Duck, MD, Amitco
Jonathan Duck, MD, Amitco

Job creation

The above evidence and comments certainly suggest that current levels of NI are making it difficult to safeguard jobs and may be adding to unemployment figures. But what about the potential of incentivising job creation through adjustments to employer NI?

The Federation of Small Businesses (FSB) believes there is huge potential for stimulating job creation across the UKs important SME base through a system of reductions to employer NI contributions.

In 2011 the FSB lobbied government to act. Surveying 2000 UK SMEs the FSB found that 44.1% claimed they would take on more staff if employer NI contributions were cut and a further 19% of small businesses said that they would do so within the next 12 months in order to meet growth objectives. For the FSB this is a particularly critical issue for small firms – a segment of the British economy which it believes could be leveraged far more effectively for economic growth, and for an agile economy of entrepreneurial and flexible businesses (p16 for more on manufacturing entrepreneurs).

At present the average small business in the UK employs just 4.54 staff – just a quarter of the size of small firms in the USA where the average is 16.1 employees. The FSB has created a target to push the UK average up to six full time employees and has assured government that, although creating exemptions for employer NI contributions in existing small businesses would reduce government income on the one hand, this reduction would be more than covered by a surge of job creation and therefore increased income tax and employee NI.

The FSB calculates that, on an average weekly salary of £489, one employee would still contribute £5,958.48 to the Treasury, or £17,875.41 for three employees. In the same instance – if these roles were newly created and exempt from employer NI – a cost barrier of £2,522.62 per employee would be removed.

Furthermore, although the FSB is supportive of a ‘National Insurance Holiday’ given to start up businesses setting up between June 2010 and September 2013, it says that there would be greater security for tax revenues in extending the scheme to existing businesses. For while around half of start ups fail in their first four years, established small businesses with growth ambitions are in a far better position to offer sustainable jobs, and tax revenues.

Andrew Churchill, managing director at JJ Churchill
Andrew Churchill, managing director at JJ Churchill

But does the FSB’s argument for NI reform extend beyond the very small end of the business scale?

“National Insurance is a tax on employment and I would welcome a reduction” – Andrew Churchill, MD of JJ Churchill

Andrew Churchill, MD of JJ Churchill is equivocal on the matter. Mr Churchill runs an SME supplying machined parts to the aerospace and defence, power generation and industrial sectors. With a workforce of 120 based in the Leicestershire town of Market Bosworth he says: “National Insurance is a tax on employment and I would welcome a reduction.”

“However,” he continues, “In and of itself a reduction in NI would not make me take on more staff. It would help cash flow. But I have the people I need.”