The Myth of the Employer Contribution

The government has pledged not to increase National Insurance for employees, but has hinted that this does not necessarily apply to the employer’s contribution. This is either blatant ignorance or blatant deceit; maybe both. The reason is that the so-called employer’s contribution is in reality paid by the employee, not the employer.

Although most employees probably think it is paid by their employer, it is not. It forms part of what employers call the wage pool, the money that employees cost them. If the employer did not have to pay it to the Treasury, it would be available to increase the amount paid to employees. It keeps their wages lower than they would otherwise be because in reality it is a jobs tax.

All taxes change behaviour, and this is no exception. It makes it more expensive for an employer to take on an employee, so fewer of them do that. It thus diminishes job opportunities as well as wages.

The name ‘National Insurance’ makes the tax more acceptable to employees if they think that they and their employer are putting money into a fund that will pay for their pension in later life. This is also a myth. There is no meaningful fund because the UK operates on a pay-as-you-go-system under which today’s contributors are funding today’s recipients, rather than their own future needs.

At a time when nearly all analysts think that the UK needs to boost its growth, it makes no sense to increase the taxes on employment. The so-called employer’s contribution is a myth and always has been. Moreover, it is a damaging myth.