How the Latest NI Reforms May Undermine Economic Growth, and What Should Be Done Instead

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Introduction

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From April 2025, UK employers face a significant shake-up in their National Insurance (NI) obligations. The government’s new policy will see the employer NI rate rise from 13.8% to 15%, while the threshold for employer contributions drops from £9,100 to £5,000 per year. This change, introduced despite pre-election assurances from the Labour Party against NI hikes, has sparked debates across the business and economic landscape. In this blog, I will critically examine the impact of these reforms, explore the projected financial implications, and offer an alternative path forward—one that better supports employment and economic expansion.

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The Policy Change: What’s Actually Happening?

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The two-pronged NI reform includes:

• An increase in the employer’s NI rate from 13.8% to 15%—raising the cost for every pound earned above the threshold.
• A dramatic reduction in the threshold at which employers begin to pay NI, from £9,100 to £5,000 per year—meaning many more jobs will now attract employer NI contributions.

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These measures will affect virtually every UK business, from small enterprises already struggling with rising costs, to larger firms with substantial payrolls. For many employers, this represents a double hit: higher rates, and a wider base of employee earnings subject to NI. The government’s stated aim is to boost Treasury revenue, but at what cost?

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Promises Made and Broken: The Political Context

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It is impossible to ignore the political context surrounding these changes. Before the last general election, the Labour Party repeatedly promised not to increase National Insurance. Yet, the government has now implemented a policy that could be interpreted as a stealth tax on employment itself.

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Some will argue that the state needs revenue to fund public services, particularly in a time of fiscal pressure. Yet the method and timing of this change have raised alarms—not least because the increased burden falls squarely on the shoulders of employers, potentially undermining job creation and business growth at the very moment when the economy most needs them.

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Financial Impact: Where Will the Money Go?

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The government estimates the NI reform will raise between £23.8 and £25.7 billion over five years. However, this headline number requires a closer look. After accounting for the increased cost of public sector employer contributions—effectively money moving from one government pocket to another—the net revenue gain drops to between £19.1 and £20.6 billion over five years.

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But the story doesn’t end there. The rise in employer NI contributions will reduce company profits, which in turn means less corporation tax will be paid—potentially reducing government tax revenue by a further £5 billion over the same period. The real net gain, therefore, may be closer to £15 billion over five years, or just £3 billion per year.

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Is this the economic boost the government claims, or a short-sighted grab that risks long-term damage?

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The Cost to Business: Jobs and Investment at Stake

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By making it more expensive to employ staff, especially lower-paid workers, these changes could force many businesses to freeze hiring, cut jobs, or even reduce wages. At a time when the UK already faces significant economic headwinds—high inflation, flatlining productivity, and global competition—this policy risks compounding, rather than resolving, existing problems.

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Let’s put the numbers into perspective:

• Reversing the NI changes would leave £4 billion with businesses—capital that could be used for investment, wage growth, or job creation.
• This reversal could, by some estimates, save or create up to 160,000 jobs at an average salary of £25,000 per year.
• Each of these jobs would bring in an estimated £3,977 per person per year in additional tax and NI, equating to £636 million annually.
• Lower unemployment would reduce benefit payments by around £320 million, and increased consumer spending would generate another £160 million from VAT and other taxes.

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These calculations suggest that supporting business growth could deliver greater tax revenue, lower welfare costs, and stronger economic performance than a blunt NI hike.

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Unemployment and Economic Opportunity

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The UK has around 11 million people aged 16 to 64 not in work, including 1.6 million officially unemployed (about 4.4%). Policies should incentivise businesses to hire, not put up barriers. If employment could be nudged up—reducing the unemployment rate from 4.4% to 4%—this could create another 160,000 jobs and generate a further £1.1 billion for the Treasury.

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Instead, by increasing the tax on employment, the government is risking higher joblessness and missed opportunities for economic inclusion, particularly in sectors that already face labour shortages, such as construction.

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Skills, Construction, and the Jobs of Tomorrow

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Where would new jobs come from if government policy encouraged, rather than discouraged, hiring? Construction is a prime example. The UK is facing a shortfall of skilled tradespeople, and ambitious targets—such as building 1.5 million new homes in five years—depend on training new workers and supporting apprenticeships.

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Yet, current policy seems at odds with these aims. Instead of investing in technical colleges and training, the government risks closing education facilities or failing to provide the infrastructure needed for workforce development.

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Employers need certainty and incentives to invest in people, not new taxes on every additional job.

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Alternative Approaches: Raising Revenue the Right Way

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If the aim is to raise government revenue, there are more balanced and honest methods than bluntly increasing employer NI. My alternative proposal would be:

• Reversing the employer NI increase, keeping rates at 2024/25 levels—releasing £4 billion annually back into business.
• Recognising that businesses seek growth, not simply profit, and that economic expansion itself will widen the tax base.
• Incrementally improving tax revenue through job creation, reduced unemployment benefits, and higher consumer spending.
• If further revenue is needed, modestly increase Employee NI for higher earners (for example, increasing rates from 2% to 4% on earnings above £50,000).

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Such a targeted approach would reverse the blanket NI reduction offered by the previous government. While it would mean higher contributions for those earning over £100,000, it would avoid penalising job creation and support a more progressive tax structure.

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The Smoke and Mirrors of Tax Politics

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Recent years have seen headline cuts to Employee NI—from 12%, to 10%, to 8%—with little change to personal allowances. Politicians have trumpeted tax cuts while allowing fiscal drag and stealth taxes to do much of the heavy lifting. It is time for greater transparency and honesty with the electorate.

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The reality is that everyone may have benefited from lower NI rates, but the distribution was regressive: the highest earners saved most, and the gap between rich and poor has widened. Asking higher earners to pay a little more, while supporting employment for all, is fairer and more economically sound.

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Summary and Conclusion

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In summary, if it were up to me, I would:

• Reverse the Employers NI changes to encourage more hiring and job creation.
• Raise Employee NI on higher earners, essentially reversing the previous government’s NI reductions for those on over £50,000 per year, so that only those earning over £100,000 are worse off than in 2023/24.
• This approach could add £3-4 billion to government revenue and support the creation of up to 320,000 new jobs.

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Economic history shows that growth, not punitive taxation, is the best way to fund public services and support prosperity. The government should prioritise policies that incentivise employment, invest in skills, and create opportunities—rather than resorting to measures that risk stalling the recovery and undermining the UK’s long-term economic health.

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The debate over National Insurance is more than a technical tax discussion; it is about the future of the UK’s economy, the fate of millions of workers, and the principles of fairness and honesty in public policy. Let us hope that policymakers choose the path of growth, opportunity, and transparency in the years ahead.

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