National Insurance Rise will Stall Growth

HM Chancellor’s decision to increase employers’ National Insurance Contributions (NICs) in 2011 will slow growth and make firms reluctant to take on recruits, business groups have warned.

In his final Pre-Budget Report before the General Election, Chancellor of the Exchequer, Alistair Darling, revealed plans for employers, employees and the self-employed to pay an extra 0.5% on NICs.

“The National Insurance increase is a nasty surprise for small firms,” said the British Chambers of Commerce’s spokesman, Sam Turvey. “Darling has announced the rise for 2011, which is essentially a tax on jobs.

“This means firms won’t employ people and that affects their growth,” he added. “If it’s going to cost you more in 2011 to employ someone, why should you take them on? That affects the economy and it affects firms.”

The increases mean that from 2011 onwards, NICs on salaries above £20,000 will rise from 11 to 11.5%.

Darling also announced an extension to the Business Payment Support Scheme, giving small firms more time to pay tax bills. In addition, the Enterprise Finance Guarantee (EFG) scheme has been extended so that small firms will be able to access another £500 million of credit in 2010.

The Federation of Small Businesses (FSB) welcomed the announcement to increase access to finance for small firms, but agreed that the NICs increase was disappointing.

“We are pleased that the EFG scheme will be extended by a year, helping more small firms to access finance,”

said FSB head of public affairs, Stephen Alambritis.

“Another lifeline for small firms with profits of up to £300,000 is the decision to postpone the 1p hike in corporation tax, and that will benefit small firms to the tune of £300 million.

“What is of concern is the intention to increase employers’ NICs for 2011. In addition, VAT will return to its former rate on New Year’s Day 2010, which will be an administrative nightmare for small firms.”

In his speech, Darling admitted that the recession had been worse than expected, and that the UK economy shrank by 4.75% in 2009 (worse than the 3.5% forecast in April).

The main announcements that will affect small firms were:

  • NICs ― employers, self-employed people and employees will pay an extra 0.5% on NICs from April 2011.
    The 1p increase in corporation tax for small firms is to be deferred. The rate will stay at 21% until April 2011, rather than going up in 2010 as previously planned.
  • The Enterprise Finance Guarantee scheme has been extended and will provide another £500 million of credit to small firms in 2010.
    HM Revenue & Customs’ Business Payment Support scheme will continue through 2010 ― giving firms more time to pay their tax bills.
  • The VAT rate returns to 17.5% on 1 January 2010.
  • A National Investment Corporation (NIC) has been created. This will manage around £3,300 million of banking credit for firms in the new Growth Capital Fund.
  • Incentives have been introduced for green company cars ― electric cars will be exempt from company car tax for five years.
  • A new 10% tax on income from patents has been introduced to boost science development.

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