The announcement this week of a hike in National Insurance rates – soon to be translated into a ‘Care Levy’ - was not really a surprise, but the way it has been implemented means that employers face a financial double whammy, and business owners potentially even a triple whammy.
The headline rate of a 1.25% increase is somewhat misleading. In fact, the figure is 2.5%, divided equally between employees and employers. But in the current climate, when many businesses are struggling to recruit and retain staff, it may well be that employers feel they can’t let their staff’s wages take this hit, and may feel obliged to increase pay to cover their employees’ share, too.
This is not a consequence-free move. An effective increase in payroll costs of 2.5% will either mean firms increasing prices to customers, thus driving up inflation, or else difficult decisions about investing less in the business for the future. Neither option is great for the economy.
And for business owners who take their income through dividends – in other words, the entrepreneurs whose risk-taking drives the economy – there could be a third hit as well. A similar percentage rise to the taxation on dividends means that owner-managers will pay the levy for a third time on their own income.
From a political point of view, you can see the rationale behind these decisions. Businesses don’t have votes, and the pointed lack of support for owner-managers who take their income in dividends during the Covid crisis showed how low a priority this group is in the eyes of the Chancellor.
Businesses are seen as an easy target. Already hit by swingeing corporation tax increases announced in the Budget in April, once again employers are being asked in practice to shoulder a disproportionate burden of the new social care levy, especially in the many sectors where staff shortages are endemic, and where even a small pay cut may result in employees hawking their scarce skills elsewhere.
There is little that businesses can do about all of this, apart from plan to take profits out of their company during the current tax year to avoid the hike in dividend tax from next April (a move which only works if doing so does not put the owner-manager into a higher tax bracket).
No-one argues that the UK’s creaking social care system doesn’t need an urgent injection of resources to make it fit for purpose. It is just a shame that political dogma has once again prevented a mature cross-party conversation about the best way to achieve that objective. The politicians continue to argue along party lines – and it is our already hard-pressed employers who will once again be picking up the tab.