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ã The Institute for Fiscal Studies, May 2021
A key question is the economic incidence of NICs: who ultimately bears the
burden, in the sense of having their living standards reduced by the tax.
The economic incidence of a tax must always ultimately be on real people. When a
tax is paid by businesses, as with employer NICs, it could be felt by the firm’s
owners/shareholders (via reduced profits from the business) or could be passed on
to the firm’s workers (via lower wages), customers (via higher prices) or suppliers
(via lower input prices). In practice, it will almost always be a combination of these.
Simple economic theory suggests that the incidence of employer NICs and
employee NICs should be the same, at least in the long run. It is likely that the long-
run incidence of both employer and employee NICs is predominantly on
employees, but the empirical evidence is not clear-cut.
More about the incidence of NICs
Employers care about the total cost of employing someone (including tax); employees care
about their take-home (after-tax) income. Neither cares how much of the wedge in between
is labelled as an ‘employer’ versus an ‘employee’ tax. So if employee NICs are increased
and employer NICs reduced, or vice versa, the laws of supply and demand for labour should
ensure that gross earnings adjust to keep labour cost and net earnings unchanged. Such an
adjustment may take time, however, and evidence
from past NICs reforms in the UK
suggests it does not happen within a year or so of any reform.
Even if the incidence of employee and employer NICs is the same, that does not necessarily
imply that the burden of employer NICs is fully passed on to the worker. The reverse is also
possible: that at least part of the burden of employee NICs (and indeed income tax) is
passed on to the employer’s owners or customers rather than being felt by the employee in
lower net earnings, if gross wages are higher than they would be in the absence of employee
NICs. Similarly, the burden of self-employed NICs (and the benefits of being taxed more
lightly than employment) might partly be felt by the business’s customers and suppliers, not
just the self-employed people themselves.
See S. Adam, D. Phillips and B. Roantree (2019), ‘35 years of reforms: a panel analysis of the
incidence of, and employee and employer responses to, social security contributions in the UK’,
Journal of Public Economics, 171, 29–50, https://www.ifs.org.uk/publications/13131.