National Insurance (“NI”)was initially introduced in 1911 through the National Insurance Act, as a form of social security with payments going towards state benefits such as sick pay, maternity leave and state pension. It is paid both by the employer (‘secondary’ contributions) and employees (‘primary’ contributions). It is also paid by those who are self-employed. On the 7th September 2021, a 1.25 percent increase in NI rates was announced by the Government to raise an expected £12 billion a year for health and social care as part of the Government’s Covid 19 recovery strategy, breaking their 2019 manifesto promise. From April 2023, NI rates will return to the current rate of two percent and the extra 1.25 percent will be collected as a new Health and Social Care Levy. For an employee with a £20,000 wage, the change will result in a £130 increase on top of their £1251 annual NI payments whereas those earning a wage of £100,000 will pay an extra £1130 in NI contributions on top of their current £5878. This increase in NI could significantly impact commercial law firms as a result of increases in their own payments, their employees’ payments, and the impact on the finances of their clients.
Direct impact on law firms
NI contributions already account for 25.7 percent of taxes paid by the UK’s biggest listed firms so the increase in NI will undoubtedly add to the financial pressures many firms are facing, especially in light of the associated difficulties caused by the Covid 19 pandemic. Given the UK government’s manifesto promise in 2019, few firms would have factored an increase into their budgeting and finances and may now be forced to consider adjustments to their spending. Commercial law firms with a large number of employees such as Linklaters with 2393, DLA Piper with 3894 and Clifford Chance with over 2900 will be faced with a significant overall NI bill and the NI rise may result in a re-evaluation of the number of staff they employ. This could ultimately lead to redundancies and a reduction in the amount of available expertise, which is significant as many firms experienced a reduction in new instructions during the pandemic as a result of the financial uncertainties and impact of the pandemic on their clients. In fact, after the first lockdown, over 50 percent of law firms reported generating lower fee incomes and over 50 percent of law firms had already made some staff redundancies before this NI increase, such as BCLP which made four percent of their staff redundant. This sets a worrying precedent for current employees who may feel threatened by the continuing stresses on the finances of their employers. The impact on students hoping to qualify as lawyers in the near future is even greater. Many mid-tier law firms suspended trainee applications during the pandemic and may be reluctant to either re-start their training programmes or resume them at pre-pandemic levels. For instance, DLA Piper and Herbert Smith Freehills both offered 2020 trainees compensation to delay the start of their training contract, while smaller British firms such as Russel-Cooke, Veale Wasbrough Vizards LLP and Freeths suspended graduate recruitment altogether.
If cuts in overheads are not made by reducing the number of employees, then savings may have to be found elsewhere. Examples include law firms reducing investment into new legal tech, as although new technologies could provide long-term gains in efficiency, which is particularly important if employment is to be reduced, they are unlikely to provide the immediate profitable benefits firms are looking for. Firms will soon be likely to have difficult ongoing discussions over where costs can be saved and which long-term investments are still vital despite the financial pressure facing them.
Impact on clients
The increase in NI will also have a significant impact on law firm clients. They will face similar dilemmas that follow increased employee costs and their ability to invest in long-term projects may need to be reviewed, which could result in a reduction in demand for legal advice. This may particularly be the case in the field of intellectual property, as technology firms tend to hold back from making big investments whilst there is such uncertainty. It is evident that the instructions for advice on M&A have also decreased. Despite this, there are some legal sectors that may benefit from the NI increase. Employment lawyers will find themselves in higher demand as redundancies increase, and tax lawyers may face higher levels of instruction as clients grapple with the changes to their businesses. Insolvency and restructuring lawyers may also face increased demand, as this tax increase will push over the edge many businesses whose survival were already being threatened by the pandemic.
Given that many large global law firms have maintained profits despite pressures from Covid-19 due to having a reliable client base made up of resilient large firms, Magic and Silver circle firms will likely experience less of the effects of the NI increase. However, it is a different story for any sole practitioners or partnerships who deal with less wealthy clients who are less able to withstand such tax increases. Thankfully, 70 percent of the money raised from the NI increase is expected to burden the only biggest one percent of companies who are most able to deal with the increase, while 40 percent of businesses will not be affected at all by the levy. This does suggest that perhaps the overall impact of the tax increase will be less significant than first thought but the impact may well be felt inconsistently.
Conclusion
Although the effects of the NI increase are uncertain and will not be clear for many years, it will be intriguing to see which legal practices see a decrease in work and which see an increase, and whether there is an overall effect on profit. There is also likely to be variations between law firms of differing sizes as larger law firms may well be able to absorb the costs at no detrimental effects to their overall profit unlike smaller firms who may already be vulnerable due to the fall-outs of the Covid-19 pandemic.
GOV.UK, National Insurance
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