The news that Chancellor Alistair Darling intends increasing the National Insurance rate has small business owners in dismay. The bad news comes at a time when the small businesses are still reeling under the effects of the economic crisis. Sluggish demand coupled with banks’ unwillingness to lend has forced many small businesses to drastically cut back just to survive.

The Chancellor has tried to soften the blow by offering extensions to several small business-friendly schemes. Unfortunately, most of these schemes will be beneficial to only a small proportion of small businesses whereas the NI hike would severely impact almost all of them. Many see it as a tax on jobs in a sector that, despite the recession, continues to employ a very large number of people, estimated to be over 50% of the UK workforce. Should small businesses cut back further, the unemployment rate, already nearly 8%, is likely to increase further at a time when there is compelling need to increase job creation!

The increasing difficulties that small businesses face could see them turning to freelancing and or outsourcing to survive, a move that could have repercussions on tax collection.

One unwelcome result of the increased NI rate could be the neglect of small business insurance. Business owners already are much too busy trying to run a successful business. Quite often they fail to get insurance cover that is required under law. With earnings being eroded by the additional costs, some of them are likely to forego what insurance cover they already have!

According to Phil Orford, Chief Executive of the Forum for Private Business, “This tax hike will come at the worst possible time for small firms – just at the point where, hopefully, the economy will be in recovery and they will be looking into taking on new staff. Putting a tax on employment isn’t the way to reduce the public debt - it will stop businesses from growing, restrict job creation and take more money from potential consumers who would otherwise put it back into the economy.”