The Government could be set to raise National Insurance contributions (NICs) by 1% for both employers and employees, a report has claimed.

The Times recently claimed senior ministers have agreed to increase rates to generate an extra £10 billion a year for the National Insurance Fund.

This would initially be used to reduce NHS waiting lists following the pandemic, before helping to fund longer-term social care reforms.

Most employers currently pay NICs at a rate of 13.8%, while the majority of employees pay NICs at 12% on their earnings in 2021/22.

The National Insurance Fund

NICs go into the National Insurance Fund, from which state benefits are paid. The state pension is the most costly of these benefits, accounting for more than 90% of the Fund's annual outlay.

A review by the Government Actuary's Department (GAD) predicted the National Insurance Fund would be empty by around 2032, resulting in this being a rather large elephant in the room for many recent governments.

Even before the pandemic, the GAD said: "If the system is to continue to cover the current form of state pension and other benefits, then either the fund's income has to rise or expenditure has to be controlled".

There is no pot of money set aside to pay future state pensions, which are funded on a pay-as-you-go basis. This essentially means that future state pensioners are reliant on the NICs of future workers to pay their state pensions.

Although the Treasury can top up the fund through a grant, restrictions on the level of grant mean this will not be enough to stop the fund from running down. The most likely alternative therefore is an increase in NICs and the pandemic looks to be a perfect excuse to do that.

Manifesto pledge

Prior to being elected to form the Government in December 2019, a Conservative manifesto pledge vowed "not to raise the rates of income tax, VAT or National Insurance".

The caveat is that this pledge was made before the onset of COVID-19, which has seen the Government spend many billions of pounds to fight coronavirus and protect the UK economy.

The three national lockdowns and regional restrictions in between significantly reduced the amount of money the Government raised in taxes, resulting in record sums of money being borrowed.

In 2020/21, the Government borrowed £299 billion - the highest figure since records began in 1946. It is expected to borrow less in the current tax year, although the figure could still surpass £200bn.

Business reaction

The Federation of Small Businesses (FSB) slammed the idea of increasing the so-called ‘jobs tax', with many firms still reeling from COVID-19.

Mike Cherry, chairman at the FSB, said:

"A lot of business owners have had the worst 16 months of their professional lives.

"Many firms are now struggling with staff being pinged, emergency loans and late payments.

"NICs essentially serve as a jobs tax, making it harder for them to create opportunities.

"To hike them as the furlough scheme and wider support measures end would stop our economic recovery in its tracks before it's even started."

Any move could be announced in an Autumn Budget and potentially take effect from April 2022.

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