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Nearly one million small firms will pay more tax after Budget, Treasury admits

Rachel Reeves promised that the smallest companies would be protected from the impact of the increase in national insurance contributions

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Rachel Reeves on the day of the Budget (Photo: Getty Images)
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Nearly a million businesses will be left with higher tax bills as a result of the national insurance increase announced in the Budget, the Treasury has admitted.

When Rachel Reeves hiked employer national insurance contributions (NICs) last month, she promised to “protect” small firms.

But the official impact assessment on the policy reveals that the Government expects hundreds of thousands of smaller companies will face higher bills.

The rate of NICs levied on employers will rise next year from 13.8 per cent to 15 per cent, and the salary threshold at which they start to be paid is being lowered from £9,100 to £5,000.

The Chancellor said she was balancing that decision by hiking the employment allowance, which all companies can set against their NICs bill, from £5,000 to £10,500. She told the Commons: “I know it is particularly important to protect our smallest companies… This will allow a small business to employ the equivalent of 4 full time workers on the national living wage without paying any national insurance on their wages.”

The Treasury’s impact assessment says that 820,000 employers will not see their national insurance liabilities change and 250,000 will have their bills cut, but 940,000 will be subject to higher bills. It adds: “One-off costs will include familiarisation with this change and updating software.”

There are only 8,000 firms in the UK which are classed as “large” because they employ 250 or more workers, meaning that 99 per cent of the companies affected will be small or medium-sized enterprises (SMEs).

The total number of firms with 10 or more employees is around 270,000, according to the Government, which suggests the majority of firms affected by the Budget tax changes will be ones which employ only a handful of staff.

The impact assessment also cites estimates from the Office for Budget Responsibility that the rise in NICs will reduce GDP by 0.1 per cent and push up inflation by 0.2 per cent, as well as leading to “lower wages and profits” for employers.

Andrew Griffith, the Conservatives’ shadow Business Secretary, said: “For real ‘economists’ it comes as no surprise that businesses are paying the price for Labour’s national insurance jobs tax. This Labour Government has not realised that shackling businesses with higher taxes only results in lower wages, higher prices for consumers and job losses. It shows how far Labour are in the pockets of their union paymasters that they are still ploughing on in the face of these objectively damaging outcomes.”

Businesses have been critical of the Budget, although this week Reeves told the CBI conference there was no realistic “alternative” to increasing taxes in order to avoid public spending cuts.

Danni Hewson of financial advisers AJ Bell told i: “If growth is a superpower, the measures announced in the Budget have been received as if they’re a kryptonite specific to business. Changing that perception and getting business back on side can and must be achieved if Rachel Reeves is going to deliver on some of the pro-growth strategies like building more homes and getting the long-term unemployed back into a job.”

Hugh Viney, who founded online school of Minerva’s Virtual Academy, added: “The raise in employers’ national insurance, when 61 per cent of all employment is by SMEs, means SMEs will either hire fewer people or let more people go – they certainly won’t be raising salaries in the near future. How is that good for workers, the economy, growth? I had such high hopes for this Government, but they are relics of the past.”

A Treasury spokesman said: “With our public services crumbling and an inherited £22bn of in-year spending pressures, we had to make difficult choices to fix the foundations of the country and restore desperately needed economic stability to allow businesses to thrive.

“The OBR confirms the Budget will have an overall positive impact on GDP and inflation will remain close to 2 per cent over the next five years. Meanwhile, more than half of employers will either see a cut or no change in their national insurance bills as a result of our changes but there will be £22.6bn more for the NHS and workers’ payslips are protected from higher tax.”

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