National Insurance Contributions Bill passes its second reading

6 Dec 2024

On 3 December, the House of Commons debated the National Insurance Contributions (Secondary Class 1 Contributions) Bill which proposes to increase employers’ NICs to 15%, lower the secondary threshold to £5,000 and raise the employment allowance to £10,500. Conservatives and Liberal Democrats strongly opposed the bill, arguing that it would have a damaging impact on small businesses; government ministers disagreed.

Conservatives repeated their concerns during an Opposition Day debate the next day, with the Shadow Chancellor saying that Labour will not create a ‘firm’ foundation for the economy. See below for a short report on this.

National Insurance Contributions (Secondary Class 1 Contributions) Bill – second reading

The Exchequer Secretary to the Treasury, James Murray, opened the debate. In response to an intervention from an SNP MP he recognised that asking businesses to contribute more “will have impacts”, but he drew a distinction between this and what would have happened if the government had increased income tax or employee national insurance - “that would have led to a tax on people’s payslips. It would have led to the amount of money in people’s pockets going down, which would have broken our manifesto promise.”

The minister said that more than doubling the employment allowance to £10,500 would mean that businesses could employ up to four people on a national living wage without paying any national insurance. This would mean “that small businesses and charities are protected”, he said.

Wendy Morton (Con) challenged this, pointing out that the official definition of a small business is one with fewer than 50 employees and with an annual turnover of less than £10 million. She said that, due to this tax increase, thousands of these businesses will face a difficult decision of whether to keep staff on or lay them off.

Stella Creasy (Lab) expressed her support for the employment allowance increase but enquired whether the government would consider extending it to private and co-operative nurseries (as it currently only applies to state-provided nurseries). In response, Murray indicated that the eligibility criteria for the employment allowance will not be changing and advised organisations to seek guidance regarding their eligibility.

Angus MacDonald (Lib Dems) warned that the changes would ‘wipe out’ the hospitality industry in Scotland. Someone working 25 hours a week on the minimum wage would see national insurance go up by 74% he calculated.

Several MPs including Christine Jardine (Lib Dems), Clive Lewis (Lab) and Luke Evans (Con) were worried about the impact of the NICs increase on small businesses and charities. However, the minister reiterated that “over half of all employers will not pay any more or will pay the same national insurance as they did before”. He argued that, along with this measure, the government has frozen the small business rate multiplier and introduced permanently lower retail hospitality and leisure rates for businesses to help these sectors.

The Shadow Chief Secretary to the Treasury, Richard Fuller, moved an amendment declining to give the Bill a second reading on the basis that “it breaks the manifesto commitment of the Labour Party not to increase National Insurance; and will lead to lower growth, lower wages for working people, fewer jobs and the closure of businesses.”

Fuller referred to polling which, he said, indicated that the proposal to increase national insurance was rated the “second worst decision of all in the Budget”. He challenged the Treasury estimates of generating £25.7 billion from the policy, saying that the Institute of Fiscal Studies predicts it will be only £16 billion.

The shadow minister suggested that “only a proportion of the money raised by this form of taxation will be allocated to public services” with a majority of it allocated to the national insurance fund, as provided for by the 1992 Acts on social security provision. He asked for the rationale behind the Chancellor choosing this tax, which he suggested would, uniquely, “burden the economy with far more in taxes levied than will actually end up going to support public services”.

Luke Murphy (Lab) accused the Conservatives of having an addiction to “cakeism” (a phrase brought to prominence by former prime minister Boris Johnson): “they want all the benefits of the Budget, but have no idea how to pay for it.”

Luke Evans argued that increasing NICs discourages GP recruitment at the “front door” of primary care, while social care at the “back door” also suffers. “It is all very well protecting the centre—the hospitals—but the biggest problem is system-wide, in that both the back door and the front door are jammed shut”.

Daisy Cooper, Liberal Democrat Treasury spokesperson, said that reducing the liability threshold to £5,000 per annum disincentivises small businesses from hiring part-time staff. This is especially concerning as many individuals can only work part-time due to fluctuating health conditions or family reasons, she explained.

Cooper said that, in contrast to the Conservatives, the Lib Dems had set out how they would fund public services in an alternative way to the NICs increase. She said that, although Labour had said its measures would amount to £28 billion for investment in health and social care, the OBR had said that, once the amount is adjusted for behaviour changes and public sector rebates, it comes to only £10 billion. “If the Government had reversed the Conservatives’ tax cuts for the big banks, that would have raised £4 billion a year. If they had doubled the remote gambling duty, that would have raised up to £900 million a year. If they had trebled the digital services tax, that would have raised £2 billion a year.”

Other Liberal Democrat MPs including Monica Harding and Munira Wilson warned that the measure could create a barrier to economic growth. “The Budget has crashed any incentive or possibility to grow,” suggested Harding.

Treasury Committee member Dr Jeevun Sandher (Lab) supported the Bill, claiming that a quarter of a million of the smallest businesses will see their national insurance tax bill fall. He said: “Countries that grow the fastest are not simply those that tax the least. If all we needed to do to create prosperity was cut taxes to their lowest level, Somalia would be richer than Sweden”. He emphasised the role of investment in delivering growth arguing that the government is investing to raise returns.

Likewise, other Labour MPs including Mark Ferguson, Olivia Bailey, Andrew Lewin and Jim Dickson welcomed the Bill with Bailey suggesting that businesses would also benefit from the government’s reform of business rates and action to tackle late payments.

Paul Waugh (Lab) criticised what he called the “Kami-Kwasi” Budget, suggesting that despite claims of tax-cutting, it increased the tax burden for millions through fiscal drag by freezing tax thresholds. He welcomed his party’s plan to end the measure in 2028, uprating thresholds in line with inflation.

Ben Lake (Plaid Cymru) said that the increase in employer NICs will impact public services in Wales, where 30% of the workforce is in the public sector, equating to £380 million in costs. He added it is not clear if the government’s support will fully cover this and asked if the minister could confirm if the full cost will be reimbursed to Welsh local government.

“This measure is dysfunctional in a literal sense,” said Dave Doogan (SNP). He said that the NICs increase would leave a £200 million shortfall in Scottish public sector finances, with over £500 million in costs.

Damian Hinds (Con) challenged the government’s claims to be “mission-led”, focused on delivering for working people, arguing that Labour has forgotten that businesses, which employ those people, generate the wealth needed for public services. He said that treating business as a ‘cash cow’ for the public sector ignores “fundamental dependency”. Referring to economists, he concluded that the Bill’s measures would lead to lower wages or lower employment figures.

Sammy Wilson (DUP) accused Labour of not fulfilling their pledge not to increase taxes on working people, suggesting that the hike on employers would impact wages so would be felt by ordinary working people.

Rupert Lowe (Reform) considered the national insurance increase and threshold cut as a tax on jobs in the private sector which would result in smaller pay rises and less employment.

Many MPs used the debate to raise the plight of businesses they had heard from in their constituencies, from Forest Footsteps Childcare in Chandler’s Ford (Lib Dem Liz Jarvis) to Sheringham Little Theatre (another Lib Dem, Steff Aquarone).

The Shadow Financial Secretary, Gareth Davies, called the measure a ‘double whammy’ – raising the rate and reducing the threshold.

Responding to the debate, the Economic Secretary to the Treasury, Tulip Siddiq, sought to reassure members that the government will support public sector employers, including central and local government, with additional employer NICs costs. She added that independent contractors like GPs, dentists, and pharmacies, would have these costs addressed through annual consultations on their contracts and entitlements, as in previous years.

Turning to devolved government matters, the minister explained that the government will support public sector employers with additional employer NICs costs, allocating funding via the Barnett formula. This ensures devolved governments receive at least 20% more funding per person than equivalent UK spending, she added. In 2025-26, the Scottish government will receive £47.7 billion, including £3.4 billion extra, and the Welsh government £21 billion, including £1.7 billion extra.

The proposed Conservative amendment to the motion to approve the Bill was voted down by 186 votes to 330. The House then voted by 332 to 189 to pass the Bill which now moves to the committee stage which will take place in a single day in Committee of Whole House on 17 December.

Opposition Day Debate

Just the next day MPs debated the employer NICs increase again, in a Conservative Opposition Day Debate.

Shadow Chancellor Mel Stride moved a motion regretting the tax rise and suggesting it “will lead to increased costs for businesses and lower wages for employees, including in particular young people; will force companies to cut employment, leading to some 130,000 job losses according to Bloomberg Economics; will increase costs for retailers by £2.3 billion according to the British Retail Consortium, leading to higher prices for consumers; will create an annual additional bill of £1.4 billion for charitable service providers according to the National Council for Voluntary Organisations, so they will struggle to maintain support for vulnerable people; and will increase childcare costs for families”. The motion also regretted the absence of an impact assessment for the change.

The Shadow Chancellor drew on Lewis Carroll in his speech proposing the motion, describing Labour’s election pledges as “fantastical statements”, “like stepping through the looking glass”. “For all the fantasy in the manifesto, they might just as well have spoken “of shoes—and ships—and sealing-wax, of cabbages and kings, and why the sea is boiling hot and whether pigs have wings.”

He returned to the theme at the end of his speech, observing that in “The Walrus and the Carpenter”, it was trusting oysters who were led to their early demise; “with the Prime Minister and the Chancellor, it is businesses that were trusting. As Lewis Carroll might have written the final verse: ‘O businesses’, said the Chancellor, ‘You’ve had a pleasant run! Shall we be trotting home again?’ But answer came there none— And this was scarcely odd, because she’d finished off every one.”

For the government, Chief Secretary to the Treasury Darren Jones challenged the Conservatives to “take the opportunity today to explain how they will raise the £25 billion that the changes provide for, but which they will not support. How else do they intend to pay for the new appointments and better services that the funding offers? What tough decisions would they make to repair the public finances and put our economy on a sustainable footing?”

Winding up the debate, the Shadow Exchequer Secretary, James Wild, warned that: “Business confidence is plummeting”. He referred to HMRC estimates that 940,000 businesses will lose out in net terms, with an average annual tax increase of £800 per employee. Additionally, he said that charities are expected to face a bill that is £1.4 billion higher.

The Conservative motion was defeated with 165 Ayes and 334 Noes.