Submitted by Bill Fernie
28th September 2026
The Hidden Cost of National Insurance – How One Tax Can Work Its Way Through the Whole Economy
When we think about National Insurance, it is easy to think of it as a tax paid by an employer to the Government.
But there is another way of looking at it.
For a business, employer National Insurance is part of the cost of employing somebody. And when that business sells something to another business, that employment cost can become part of the price charged.
The customer then has its own employees, with their own employment costs, and the process continues.
That means the impact of an increase in employer National Insurance can spread much further through the economy than the original tax bill might suggest.
This is particularly important as Chancellor John Healey prepares for his Budget on 28 October.
The British Chambers of Commerce has found that 82% of businesses surveyed expected the increase in employer National Insurance to affect their business. Some 58% said it would affect recruitment and 54% expected it to affect prices.
The issue therefore isn't simply how much extra National Insurance a particular company pays.
It is what happens afterwards.
Follow the money through a supply chain
Imagine a construction project in Caithness.
A main contractor employs its own workforce and pays employer National Insurance.
It then brings in an electrical contractor, a plumber and perhaps a joinery company.
Those companies employ people and their employment costs include employer National Insurance.
The main contractor also buys materials.
The manufacturer of those materials employs people. The wholesaler employs people. The haulage company transporting the materials employs people.
There may also be architects, engineers, surveyors, accountants and other professional services involved.
All these businesses have their own employment costs.
National Insurance is not being charged repeatedly on the same pound. That would be misleading.
Instead, the additional cost of employing people can be incorporated into the prices charged at different stages of the supply chain.
By the time the project is finished, a surprisingly large number of the businesses involved may have been affected by higher employment costs.
That is why the phrase "cost of doing business" is important.
Businesses have several choices
A business facing higher employment costs has several options.
It can absorb the cost and accept lower profits.
It can hold down wage increases.
It can employ fewer people.
It can invest less.
It can try to become more productive.
Or it can increase the prices it charges its customers.
In reality, it is likely to do some combination of these things.
The Institute for Fiscal Studies points out that the ultimate economic burden of employer National Insurance can fall on workers through wages, customers through prices, owners through profits or suppliers through the prices they receive.
That makes the consequences much wider than the employer who actually writes the cheque.
The inflation problem
This is where National Insurance becomes particularly interesting.
If thousands of businesses respond to higher employment costs by increasing their prices, those increases can contribute to wider inflation.
The BCC reported in 2025 that labour costs were the main cost pressure for 73% of businesses, rising to 88% in transport and logistics. It also found that many firms were expecting to raise prices.
Transport is particularly important because it sits underneath so much of the economy.
A haulage company faces higher employment costs.
It raises its prices.
The manufacturer pays more to transport its goods.
The manufacturer increases its prices.
The wholesaler pays more.
The retailer pays more.
Eventually part of the original cost pressure can reach the consumer.
It is not a straight line and businesses will absorb different proportions of the cost. But the principle is important.
The cost of employing people does not necessarily stop at the employer.
It can also affect jobs
There is another side to this.
If a business cannot raise prices because competitors are already cheaper, it has to find savings elsewhere.
That can mean fewer new recruits, reduced hours, delayed investment or redundancies.
The BCC reported that 13% of businesses surveyed had already made redundancies as a result of the National Insurance increase, while a further 19% were considering redundancies.
Again, these are survey findings rather than proof that every redundancy was caused by National Insurance.
But they illustrate the dilemma facing employers.
A tax intended to raise money for public services can simultaneously increase the cost of creating jobs.
That does not mean the tax is necessarily wrong. It means there is an economic trade-off that needs to be considered.
And investment can suffer
Perhaps the biggest long-term concern is what happens to investment.
A company deciding whether to buy new machinery, open another branch or take on additional staff looks at the total cost of the project.
If employment is more expensive, some projects that might previously have gone ahead may no longer produce a sufficient return.
The BCC's economic forecasts have linked increased business costs, including the National Insurance rise, with weaker investment expectations.
This creates an awkward circle.
Higher costs can discourage investment.
Less investment can reduce productivity growth.
Slower productivity growth makes it harder for wages and living standards to rise.
And weaker investment can make it harder for the economy to grow quickly enough to generate the additional tax revenue governments need.
What can a Chancellor do?
This is the difficult question facing John Healey.
The Government needs tax revenue to pay for public services.
But businesses need sufficient room to employ people, invest and grow.
The BCC is now calling for measures including a reduction in employer National Insurance for under-25s and reductions in energy and business-rate pressures.
Whether such measures should be adopted is ultimately a political decision.
But the economic question is clearer.
What is the total cost of raising another pound of tax if the tax also changes the behaviour of the businesses paying it?
A tax can raise money directly while also affecting employment, prices, investment and economic activity.
That is why looking only at the amount collected can miss part of the story.
The Caithness effect
This matters in Caithness because the local economy is made up of many relatively small businesses.
A building contractor may employ tradespeople and buy materials locally.
A local supplier may employ drivers.
The driver may be delivering to another business.
A hotel may employ staff while buying food, laundry, maintenance and transport services from other businesses.
A retailer employs people while buying goods from wholesalers.
Each business is part of somebody else's supply chain.
That means a change in the cost of employment can move through a local economy just as it can through the national economy.
It may eventually appear as a higher quote for building work, a higher transport charge, a higher hotel price, a higher repair bill or a higher price on a shop shelf.
The original National Insurance increase may be almost invisible by then.
The customer simply sees that something costs more.
The real Budget test
This is why the Chancellor's challenge is more complicated than deciding whether to increase or reduce one particular tax.
The real test is whether the Budget can create enough room for businesses to invest and employ people while still raising the money required for public services.
Businesses are not simply asking for lower taxes.
They are asking for the accumulated costs of employing people, energy, rates, regulation, finance and investment to be considered together.
And perhaps the most important question is not:
"How much National Insurance will the Government collect?"
It is:
"What happens to that cost after the Government has collected it?"
Because once it enters the economy, it does not necessarily stop with the employer.
It can travel through the supply chain, into business prices, investment decisions, employment decisions and eventually the household budget.
That is the hidden cost worth watching when the Chancellor stands up on Budget day.