Robots hail Reeves’s AI-Friendly Budget

As anticipated, Rachel Reeves has announced a rise in the Employer National Insurance Contribution (NIC) rate, adding 1.2% to the current 13.8%, bringing the total to 15%. Just as impactful is the reduction of the employer NIC threshold from £9,100 to £5,000.

To acknowledge the positives: The employer’s allowance will be increased from £5,000 to £10,000 (although the benefit of this will in many cases be negligible). Aside from that, and the fact the new rate and threshold are easy-to-remember round numbers, there’s little else to cheer about here for those employers keen to increase their workforce (with humans).

The rise in employer National Insurance contributions will bring substantial added costs for employers. Some micro businesses may not be affected substantially but most SMEs will see increased costs and for companies with large workforces, especially those with large headcounts consisting of many lower-paid or part-time roles. Hospitality and supermarket retail come to mind.

Case Study

As a case-study, we’ve undertaken a number-crunching exercise to demonstrate how significant the increased cost could be for some of our clients. We’ve taken a hypothetical SME manufacturing business with over 150 staff and total staff costs in excess of £5million. At the current rate of 13.8 per cent and with the threshold at £9,100, the employers NICs liability for this company would be in the region of £495,000.

An increase of NICs to 15%, and a reduction of the threshold to £5,000 (and allowing for the increase in Employers Allowance to £10,000), would see the Company’s Employer NICs bill increase to circa £630,000.

Looking across our client base, it’s clear that for the vast majority, these rate changes mean a direct increase in operating costs. With the hike in Employer National Insurance contributions combined with the recent rise in the National Living Wage, the era of “cheap labour” is effectively coming to a close. Businesses will now need to budget for a workforce that costs more—potentially reshaping hiring strategies and give pause to ignoring those “Learn how AI can revolutionise your business” emails.

A further potential unintended consequence of this increase to the cost of employment is that it will further widen the cost differential between direct employment and hiring of self-employed subcontractors. This has the potential to further grow the levels of “disguised employment”, and ironically, increase risk in lost revenue for the treasury.