The raising of National Insurance contributions by 0.5 per cent from 2011 has been described as a “back door” tax that could hit hard at law firms already struggling to cope with a decline in deal flow.
The announcement in today’s pre-Budget report (PBR) comes on top of a similar announcement made in last year’s budget and effectively means that employers and employees will face a 1 per cent hike in 2011.
A tax partner at a top 10 City firm said that the PBR was being used to introduce “more income tax by the back door for employees, as well as a further tax for employers”.
The partner added: “Half a per cent on the payroll could be quite a big number so it affects the partners. It could be the straw that breaks the back for some.”
Michael Carter, a partner at Addleshaw Goddard and head of the firm’s employee incentive group, said: “This is an additional tax burden on employers and employees. NIC’s again being used as an easy means of raising tax income from employers and employees.
“I’d suggest that everybody, save for perhaps politicians, would benefit from the amalgamation of NIC and income tax so we have real clarity and everybody can clearly see tax changes.
“In everything but name this is a 1 per cent increase in income tax.”
The Chancellor’s announcement of a new 50 per cent tax on bankers’ bonus pay has also attracted criticism from City partners.
“People in the City will react very badly to this,” said Michael Wistow, head of tax at Berwin Leighton Paisner.
“It’s another example of a politically motivated tax change, which is unlikely to raise significant revenue. It’ll make the UK less attractive and put it at a significant competitive disadvantage.
”Introducing the charge at this point in the financial year is essentially retrospective, as it’ll affect income and bonuses dating back to April 2009. It’s another example of the unpredictability of the UK tax system, which is in itself damaging to business and investment in the UK.”
The news comes on the back of reports that Downing Street is preparing a document outlining plans for a transaction tax, increasing tension between the Government and the City.