October 29th 2024.
As we eagerly anticipate the national budget announcement tomorrow, all eyes are on Rachel Reeves and the potential increase in employers' national insurance contributions. This particular decision has sparked controversy among various groups, including the Tories, small business owners, and charities. Many are questioning whether this goes against Labour's promise in their manifesto to not raise national insurance.
While Sir Keir Starmer and his ministers argue that their pledge only applied to taxes for "working people", which they interpret to mean employees rather than employers, Paul Johnson from the Institute for Fiscal Studies believes that any increase in employer contributions will ultimately affect employees as well. This begs the question, how much national insurance do we currently pay?
Well, that depends on a few factors, such as whether you are an employee, employer, or self-employed. There are four classes that determine the contributions for different groups, with the majority falling under Class 1 for employees. Self-employed individuals fall under Class 2 or 4, while Class 3 is for voluntary contributions. To add to the complexity, there are 16 different categories within Class 1, each designated by a different letter of the alphabet.
Turning to the potential increase in NICs, if Reeves decides to target employers, it will not affect employees' contributions, as Labour has promised. Currently, employees only start paying national insurance once they earn over £1,048 a month, and anything above that is taxed at either 2% or 8% for most people. On the other hand, before this budget, employers either paid nothing or 13.8% towards their workers' national insurance. However, there is a strong possibility that this may change tomorrow.
But what exactly is national insurance? It is essentially a tax on all earnings or profits for the self-employed. Paying it means you qualify for certain benefits, such as the State Pension, Maternity Allowance, and Jobseeker's Allowance. The specific benefits you are eligible for depend on the class you fall under.
As for the potential increase, we do not have any official confirmation from the government, but the Guardian has reported that Reeves may raise employer NICs by up to 2% and lower the threshold for paying. This could potentially bring in an additional £20 billion for the Treasury.
If this speculation turns out to be true, many may wonder why this decision was made. According to Reeves, tough choices must be made to address the £22 billion deficit in the public finances that was discovered after the election. With limited options due to the promises made in their manifesto, increasing employer NICs may have been the only viable solution. However, this will undoubtedly lead to debates over whether Labour has truly kept their pledge.
In the end, it is important to remember that regardless of who pays for the increase in NICs, it will ultimately have a negative impact on workers. As Paul Johnson points out, the evidence suggests that employees will either see a decrease in wages or potentially even job loss in the long term. So, as we await the budget announcement tomorrow, let us keep in mind the potential implications of this decision on the everyday worker.
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