Britain’s army of small employers will particularly benefit from the change, as many more will not have to pay any contributions at all allowing them to add to their workforce and boost productivity.
Employers are already able to write-off the first £2,000 of their NIC liabilities for workers. But this tax allowance will rise to £3,000 from next year.
It means firms could hire four workers on the new National Living Wage of £7.20 an hour – around £13,494 a year – without hitting the £3,000 National Insurance threshold. They would therefore not have to pay any contributions.
Alternatively, they could also hire one worker on £29,800 without reaching the £3,000 cap.
The Budget documents said: ‘This will help all businesses and charities, particularly smaller ones, with additional wage costs. As a result, up to 90,000 employers will see their employer NIC liability reduced to zero.’
Mr Osborne added that he was cutting employers’ national insurance contributions ‘to help small firms’.
Ashley Hollinshead, at accountants Deloitte, said: ‘This increase will be welcomed by the estimated 1.25million employers that are entitled to this relief’.
But other firms said this modest giveaway may offer little solace to those struggling fledgling companies now required to pay the new living wage. David Brookes, tax Partner at BDO, said this ‘positive move’ would be ‘largely offset by the introduction of the national living wage which may well have a significant impact on small businesses’.
While all private businesses and charities will be eligible for the higher employment allowance, smaller firms which employ only a handful of staff could be pulled out of the tax all together.
The Government said this allowance, however, will no longer be available to companies where the director is the sole employee.
The £1,000 rise to the allowance will cost an extra £630million in 2016-17, rising to around £700million by 2020-21.
Meanwhile the self-employed could face an increase in their National Insurance contributions as part of a Government tax review.
Currently they pay two rates of National Insurance – a weekly rate of £2.80 known as Class 2 contributions and a percentage rate of 9 per cent on earnings above £8,060 a year, known as Class 4.
This compares with employed NI rates of 2 per cent for lower earners and 12 per cent for high earners.
The reason that the self-employed pay a lower rate is that they never used to qualify for extra state pension benefits. But under the new flat rate state pension to be launched next year, there will be no extra benefits. As a result, many had feared the self-employed were due for a tax hike.
Yesterday, Treasury officials announced a consultation which will see Class 2 National Insurance abolished and reform of Class 4 contributions.
