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UK Business Laments Darling's 'Tax On Jobs'

by Robert Lee,, London

14 December 2009

In the end, there were few surprises in Chancellor Alistair Darling's pre-budget report (PBR) on December 9 – the main measures such as the bankers' bonus tax and the reversion of value-added tax to 17.5% were all anticipated. However, the decision to raise National Insurance Contributions (NICs) by a further 0.5% has ruffled more than a few feathers.

Whilst most observers and commentators fully expected Darling to continue to "soak the rich" through measures such as restricting higher rate tax relief on pensions for those earning GBP130,000 or more, freezing the inheritance tax threshold and forging ahead with the 50% tax rate, the fact that the NICs increase will affect those on incomes as low as GBP20,000 has come as something of a surprise. Moreover, Darling seems determined to use the GBP3bn per year that he says this will raise to maintain spending rather than to reduce Britain's alarmingly high budget deficit, which is set to hit GBP180bn.

"I am determined we will protect the improvements in these front-line services on which millions rely," Darling told the House of Commons during his PBR speech. "This cannot be done without a further difficult decision."

"I intend to increase all employer, employee and self-employed rates of National Insurance by a further half a per cent from April 2011. To protect those on modest incomes, I have also decided to raise the starting point from which national insurance is payable. No-one earning under GBP20,000 will pay any more national insurance contributions as a result," he announced.

The further 0.5% rise comes on top of the half-a-percentage point increase announced by Darling in last year's PBR. However, the increase will not just affect employees, but also their employers, as Mike Nagle, employment tax director at PricewaterhouseCoopers LLP, explains:

“NIC increases will have a significant impact on employment costs, which already account for two-thirds of business costs in some organizations and are likely to be viewed by employers as a tax on providing jobs in an unstable employment landscape," he noted. "These increases are likely to prompt employers to ensure they have taken full advantage of the savings available through tax and NIC-efficient salary sacrifice arrangements.”

While a 0.5% increase in NICs sounds like a modest rise in taxation, Patrick King, Tax Principal at MacIntyre Hudson argues that it actually equates to a 2% increase in tax because they are paid by both employers and employees and each half per cent increase raises 1% of the earnings of the employed.

"Combined with the increase announced last year, total National Insurance Contributions on the employed will therefore rise by 2% from April 2011, with 1% extra paid by both the employer and employee," King said. “It shows breathtaking gall to announce, over two years, four separate half per cent rises, all to come in together, and hope that nobody will notice that it is a 2% rise in total."

While the bankers' bonus tax naturally grabbed all the headlines following Darling's speech, this levy, even according to the government's own optimistic predictions, will only raise a relatively paltry GBP500m for the Treasury. Indeed, Darling should be hoping that the tax does not raise a single penny in revenues because then it would have achieved its goal. Therefore, it seems that this was the appropriate cover from which to announce perhaps the major revenue raiser in this year's PBR.

"The increases (in NICs) announced both this year and last will raise a total of GBP9bn in a full year," claims King. "And yet this is the closest we have to a tax on jobs. If the Chancellor’s aim is an anaemic and jobless recovery, he couldn’t have chosen a better measure.”

The chancellor may also have inadvertently encouraged many small businesses and self-employed people to consider becoming limited companies in order to take advantage of the one year delay in the 1% rise in the small business rate of corporate tax, which is currently 21% on profits of less than GBP300,000 per year. By contrast, a self-employed individual making profits of more than around GBP44,000 has to pay 40% tax whilst if profit is in excess of GBP150,000 from April 6, 2010 they will have to pay the new higher rate tax of 50%.

“If an individual earning GBP150,000 or more from a self-employed business decided instead to become a limited company, they could pay themselves a salary and ensure they stay within the basic rate of tax and if they need more income, they can pay themselves in dividends, saving themselves a considerable amount of tax,” explains Catherine Vickery, tax planning specialist at accountants and financial advisors Old Mill.

“And, the 1% rise in the rate of National Insurance from April 2011 also makes incorporation a more attractive proposition, because National Insurance is only payable on salary and not total income,” she adds. “Therefore, if a small business or self-employed business was to become a limited company, they would only have to pay national insurance on the salary they paid to themselves and not the total profit earned."

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