The reasons small firms fear a rise in national insurance

Entrepreneurs are considering recruitment freezes, cutting workers’ hours, and even selling up amid concerns about potential tax changes in the budget.
Speculation is mounting that the chancellor, Rachel Reeves, will raise national insurance for employers on October 30. The prime minister, Sir Keir Starmer, has refused to rule out raising the levy for companies and Reeves last week told businesses at the government’s investment summit that taxes will have to rise.
Employers pay national insurance at 13.8 per cent on workers’ earnings above £175 a week. Increasing the 13.8 per cent rate by 1 percentage point would raise about £8.5 billion for the Treasury in 2025-26, while a rise of 2 percentage points would bring in £16.9 billion, according to the accountancy firm EY.
Employers don’t pay national insurance on pension contributions, but there are rumours that the chancellor could change this. At a rate of 13.8 per cent this would raise about £17 billion a year, the Institute for Fiscal Studies said.
Luke Blaney, 29, has put plans to take on more staff on pause amid uncertainty over employers’ national insurance. He has been running his recruitment company, ARx, for five years and employs eight people.
The business, based in Brighton, pays an average of £5,300 a year in national insurance contributions per employee. This could rise by about £800 per employee if it goes up by 2 percentage points.
“We were planning on hiring another staff member this year and two or three more next year, but that has been stopped now until we know what is going to happen in the budget,” Blaney said.
Blaney had also been considering a more generous pension scheme for employees, but the plans have been put on ice because of speculation that employers may soon have to pay national insurance on pension contributions.
Since 2012, employers have had to automatically enrol any worker aged 22 and over who earns £10,000 a year or more into a workplace pension. Legally, employers must contribute a minimum of 3 per cent of an employee’s salary and the employee must pay in 5 per cent.
Blaney’s company pays in the minimum 3 per cent, but had hoped to increase this to attract talent into the business. “We want to make our benefits package more attractive, but while all of this is happening we have paused the plans,” he said.
“Small business owners have been on a cliff edge for years. We’ve faced Covid and a looming threat of recession. Now, the government is talking about taxing business to the point where you can’t grow.”
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There were 5.45 million small businesses (those with fewer than 50 employees and a turnover of £10.2 million or less) in the UK at the start of the year, according to the Department for Business and Trade. Of these, 1.16 million were microbusinesses, with fewer than ten employees and a turnover of £632,000 or less.
Confidence among these companies has tumbled this year. The Federation of Small Businesses (FSB), a trade body, uses a points-based system to measure business confidence. Its latest quarterly survey found that it had dropped to -10.8 in the three months to May, down from 5.5 in the three months to March. It hit a record low of -143.3 in the first quarter of 2020, at the start of the Covid pandemic.
Tina McKenzie from the FSB said: “There is no doubt that small firms are putting off pay rises and delaying hiring until they see what the budget brings.
“Tax rises for employers will mean pay cuts, hiring freezes and worse. The budget should be aiming to help small firms and entrepreneurs grow, not giving them sleepless nights as it approaches.”
We speak to small business owners about their concerns.
Lee Harris-Hamer pays about £18,000 a year in national insurance contributions for the five staff at his commercial laundry business in Thirsk, North Yorkshire. If the rate rises 2 percentage points, the bill will increase to £20,600.
Harris-Hamer, 33, fears he will have to put off hiring more staff and reduce workers’ hours if the tax is raised. Cutting an employee’s working hours to 20 a week would keep their earnings below the £175-a-week threshold at which national insurance kicks in.
“I had expected to have ten members of staff by the end of the year but now I need to rethink our growth plan,” he said. “If this increase comes in, I’ll wish I had never started this business.”
The FSB said the operating costs of more than 75 per cent of small businesses have increased in the second quarter of the year, with labour the biggest expense.
With so much uncertainty, Harris-Hamer is considering closing his company, which he opened in April. His other business, a commercial cleaning company, employs 60 staff and pays about £55,000 a year in national insurance. “The government has said it won’t raise taxes for working people — do small business owners not matter then? It feels like we are being penalised,” he said.
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Rochelle Anthony has been running her salon, The Dollshouse, in Milton Keynes for 13 years. But she is considering cutting staff hours and downsizing to a smaller premises if national insurance rises.
Anthony, 37, paid £6,900 last year in national insurance contributions for her three staff. She may have to pay an extra £1,000 a year if it goes up by 2 percentage points.
Anthony would have to cut back her stylists’ hours from eight to six a day to afford the increase, which will mean picking up extra hours herself. This would prevent her from growing the other side of her business — training stylists in her local area.
“I would have to be on the salon floor cutting people’s hair, because I wouldn’t be able to afford to pay my staff,” she said.
Anthony had plans to hire an extra ten members of staff over the next three years, but will have to scale back her plans if national insurance rises. She is considering relocating to a smaller premises to reduce her rent, which would free up money for a higher tax bill.
“Small business owners are just trying to make ends meet. A tax increase will severely impact people like me, operating on such small profit margins,” she said.
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Increasing national insurance for employers could hit workers as well as small businesses as bosses cut hours and perks.
Paying national insurance on a £35,000 salary costs an employer £3,575 a year, according to the accountancy firm Blick Rothenberg. Increasing the 13.8 per cent rate by 1 percentage point would cost an extra £258, and a 2 percentage point increase would cost £517.
Andrew Timpson from the accountancy firm RSM UK said: “An increase would put acute pressure on a small business. Some firms could cut costs, through reduced hours or four-day week agreements to help manage the burden, and in extreme cases, make redundancies.”
Making companies pay national insurance on pension contributions would also come at a big cost. Every £100 an employer contributes to a pension pot would cost an extra £13.80 at the 13.8 per cent rate.
A company making a 5 per cent pension contribution for a worker earning £30,000 a year would pay £207 a year national insurance on those payments. “Many employers, especially small firms, will not be able to absorb such costs,” said Tom McPhail from the consultancy The Lang Cat. He said they would feed through to staff in the form of lower pension contributions or salaries.
The government said: “We’re supporting businesses through pledges to cap corporation tax at 25 per cent, make the business rates system fairer, and to publish a business tax roadmap so that future investments can be planned with confidence.”