Workers and bosses brace for 'tax rise'

Workers and bosses brace for 'tax rise'

UK jobs are at risk from the imminent rise in National Insurance (NI) contributions, business groups have warned.

Both employees and employers will be forced to pay higher NI contributions from Sunday, in a move announced in last year's Budget.

The government says the boost to its coffers will raise much-needed funds for the National Health Service (NHS).

But critics have warned it could not have come at a worse time for businesses and employees, given the fragile state of the economy.

A new tax?

From Sunday, the rate of NI contributions for employees will rise from 10% to 11% on annual earnings between £4,615 and £30,940.

Workers will also have to pay NI at the rate of 1% beyond the previous upper limit of £30,940.

The table shows how much more UK employees will lose out every year.

INCREASED EMPLOYEE CONTRIBUTIONS
ANNUAL SALARY	2002/03	2003/04	Increase (per year)
£10,000	£538	£592	£54
£15,000	£1,038	£1,142	£104
£20,000	£1,538	£1,692	£154
£25,000	£2,038	£2,242	£204
£30,000	£2,538	£2,792	£254
£40,000	£2,580	£2,985	£405
£60,000	£2,580	£3,185	£605
£100,000	£2,580	£3,585	£1,005

Source: Ernst & Young

These NI contributions are payments which enable an individual to qualify for certain types of social security benefit.

Without a full contribution record, an individual may not qualify for full basic state retirement pension or other benefits such as job seeker's allowance and maternity benefits

Mike Warburton, senior tax partner at Grant Thornton told BBC News Online that he considered the increased payments a disguised tax hike.

"It has none of the characteristics of National Insurance and has all the characteristics of Income Tax," he said.

Something to give

Such criticism has been widespread since the government introduced the idea in its last budget.

Something has got to give - and what a lot of companies are saying is that it's going to be people

David Frost, BCC

Despite suggestions that it will raise an estimated £8bn for the NHS, business leaders have condemned the timing of the move.

The British Chambers of Commerce (BCC) warned last month that one in five companies could be forced to lay off staff as a result.

"This has come at a very difficult time for companies," the director general of the BCC, David Frost, told BBC Radio 5 Live.

"We know that company profits are the lowest they've been for 10 years, we know that margins are being squeezed inexorably, we know that competition continues to grow, and something has got to give - and what a lot of companies are saying is that it's going to be people."

Employer needs

Employers will also pay an extra percentage point in NI contributions for their staff on salaries over £4,615.

Their contributions will rise from 11.8% to 12.8%.

Small businesses in particular have complained that the increased contributions follow a raft of other measures which are have a cumulative knock on their profits.

The increase..... means there will be 66,500 more nurses, 20,000 more consultants and GPs and almost 100 new hospitals than in 1997

HM Treasury

Terry Deakin runs Advance Coils, a lighting and alarm systems business in Manchester.

"We're really getting to the point where our backs could be broken," he told BBC Radio 4's Today programme:

"Over the last few years there's been all sorts of regulation - the working time directive, data protection, new regulations for maternity leave.

"It's all wonderful stuff but it's coming at such a pace that it's eroding profits.

"We can't pass it on to the customer because they can purchase from the Far East at a much cheaper price than we can."

Healthy workforce

The Treasury defended the NI hikes, insisting they would provide essential resources for Britain's health service and therefore create a healthier workforce.

"The increase... is purely to fund the NHS and means there will be 66,500 more nurses, 20,000 more consultants and GPs and almost 100 new hospitals than in 1997," a spokeswoman told BBC News Online.

"Business will also benefit from an improved health service - a CBI survey on workplace absence estimated it cost companies £11.8bn in 2001."