Employer NICs Holiday to tackle economic inactivity crisis could save up to £1.1 billion per year
Executive Summary
A year-long Employer National Insurance Contribution (NIC) holiday for firms that bring people receiving long-term sickness or disability benefits into full-time work is a credible, popular and progressive policy solution to a multi-layered crisis facing the Government on the welfare bill and economic inactivity.
By exempting Employer NICs for one year when businesses hire those who have been on long-term sickness or disability benefits into full time work, this policy:
Saves up to £1.1 billion a year, reducing spending on out-of-work benefits.
Creates a powerful hiring incentive, helping employers to play a part in tackling the economic inactivity crisis.
Boosts economic growth, tackling labour shortages that are holding businesses back.
The policy would be complimentary to existing government policy.
Our own polling shows this approach has the majority backing of both the general public and the business community.
This approach is overwhelmingly popular with the public and the business community:
67% of the public backs giving businesses tax incentives for hiring long-term sick workers, including 74% of Conservative to Labour swing voters
78% of businesses think it’s important that the Government improves public health to support recruitment (GGF polling in The Times).
Considering reasonable assumptions on policy uptake, ‘deadweight’ levels and job displacement, the policy could return between £305 million and £1.1 billion net savings per year. The loss of Employer NICs from people who would return to the workforce regardless of the policy’s implementation (the ‘deadweight’) is cancelled out by the reduction of benefits cost and an increase in Employee NICs. We assume a conservative deadweight figure of 16%. If the policy fails to incentivise any new workforce participation, it would cost £911 million. To break even, 67,000 additional jobs beyond the deadweight level would need to be filled.
Policy and Scenarios
Businesses would not pay Employer NICs for new hires who were economically inactive*, and previously in receipt of long-term sickness or disability benefits. This covers individuals in receipt of a combination of Universal Credit, incapacity benefits, and Employment Support Allowance.
The Treasury would lose Employer NICs for each hire from a person that is economically inactive due to health reasons. The Treasury begins to make significant savings when more than 67,000 people on long-term sickness or disability benefits enter the workforce. This is through a combination of:
Paying out fewer benefits;
New people joining the workforce paying income tax and Employee NICs.
*The criterion for which would be determined by the Government.
The NICS holiday would apply for one year per employee. Eligibility extends to those re-joining the workforce on a full time basis. It acknowledges that some of those hired from long-term sickness/disability benefits may need an ‘on-ramp’ into work to reach full productivity compared to those who have not been on such benefits. The tax relief would provide an incentive for businesses to hire those out of work due to long-term sickness or disability, offsetting the risk to business of these employees having lower productivity and helping this cohort back into work.
This policy works alongside existing government policy: it provides additional support beyond reforms to eligibility criteria for these benefits and existing employment support programmes such as Access to Work, which DWP is reforming to put more responsibility on employers to manage workplace adjustments for hiring those with disabilities.
Our research shows the policy may have an associated cost of £911m, should take-up fail to extend beyond the deadweight level. We believe that the popularity and potential wider gains of supporting economically inactive people into work outweighs this potential cost. It's crucial to note that there is a high likelihood that we have overestimated the deadweight level, to provide cautious calculations at this preliminary stage. The policy becomes a fiscal contributor at relatively small increments of additional job uptake.
The following additional economic benefits have not been factored into the presented costings:
People that are moving off benefits and into employment will be increasing economic growth by producing additional goods and services and increasing their purchasing power.
Their increased earnings from moving off benefits and into employment will result in greater consumer spending further supporting growth and increasing consumption taxes like VAT.
Assumptions are detailed below the scenario. Please note we have included a figure with a replacement rate and without a replacement rate.
We have provided full cost analyses for this policy with all major scenarios as below:
Scenario 1: Break even
Assumes the baseline rate of long-term sick people moving into work is 16% (the deadweight)
On top of this, an additional 15.0% of the deadweight (67,000) people move from long-term sick into work as a result of this policy
Assumes 50% replace other workers
Employer NI loss: £979m/annum
Employee NI gain: £30m/annum
Employee income tax gain: £76m/annum
Welfare payment savings: £874m/annum
Total fiscal gain: £1m/annum
Total fiscal gain if replacement rate is 0%: £334mn/annum
Scenario 2: Conservative
Assumes the baseline rate of long-term sick people moving into work is 16%
Assumes an additional 20% of the deadweight (90,000) people move from long-term sick into work as a result of this policy
Assumes 50% replace other workers
Employer NI loss: £1002m/annum
Employee NI gain: £40m/annum
Employee income tax gain: £101m/annum
Welfare payment savings: £1166m/annum
Total fiscal gain: £305m/annum
Total fiscal gain if replacement rate is 0%: £749mn/annum
Scenario 3: Moderate
Assumes the baseline rate of long-term sick people moving into work is 16%
Assumes an additional 25% of the deadweight (112,000) people move from long-term sick into work as a result of this policy
Assumes 50% replace other workers
Employer NI loss: £1025m/annum
Employee NI gain: £50m/annum
Employee income tax gain: £126m/annum
Welfare payment savings: £1457m/annum
Total fiscal gain: £609m/annum
Total fiscal gain if replacement rate is 0%: £1.164bn/annum
Scenario 4: Optimistic
Assumes the baseline rate of long-term sick people moving into work is 16%
Assumes an additional 33% of the deadweight (148,000) people move from long-term sick into work as a result of this policy
Assumes 50% replace other workers
Employer NI loss: £1061m/annum
Employee NI gain: £66m/annum
Employee income tax gain: £166m/annum
Welfare payment savings: £1923m/annum
Total fiscal gain: £1.095bn/annum
Total fiscal gain if replacement rate is 0%: £1.828bn/annum
Scenario 5: Deadweight change
In previous scenarios, we have used a pessimistic deadweight figure of 16% (see below for our reasoning). In the below scenario, we show how a different deadweight estimation can affect the model.
Assumes the baseline rate of long-term sick people moving into work is 10%
Assumes an additional 33% of the deadweight (93,000) people move from long-term sick into work as a result of this policy
Assumes 50% replace other workers
Employer NI loss: £663m/annum
Employee NI gain: £42m/annum
Employee income tax gain: £104m/annum
Welfare payment savings: £1202m/annum
Total fiscal gain: £685m/annum
Total fiscal gain if replacement rate is 0%: £1.142bn/annum
Explanation of Assumptions
This policy briefing is preliminary and indicative only. We have made conservative assumptions on a number of factors, including deadweight, uptake of jobs, replacement of workers and the nature of the jobs/work. In our full report, to be published later this year, we intend to conduct further analysis to interrogate the figures for these assumptions.
Deadweight Level
To calculate the additional impact of this policy, we have sought to conservatively estimate the number of people on long-term sickness or disability benefits who are returning to work each year without the new intervention.
2.8 million are economically inactive due to long term sickness. The ONS has made estimates of the percentage of this cohort which are in receipt of different types of benefits.
The ONS estimates that between April 2021 to July 2022, the percentage of people inactive due to incapacity who entered the workforce is 16%.
We have used this percentage as the base case deadweight level in our modelling in all but one scenario. This gives a deadweight figure of 449,000 individuals returning to employment without the policy intervention.
We believe that this is a significant overestimate for several reasons, but have chosen to be cautious:
This number is not segmented between those on benefits and those that are not. Therefore, it is likely that it is inflated.
The figure is likely affected by the Covid-influenced distortions to employment patterns.
This occurred during an unprecedented period in the labour market, where job growth was very high and an extremely low number of unemployed relative to vacancies. This was therefore a better environment for the economically inactive to enter into work, and the vacancy rate today is now lower than before Covid-19.
The overall number of economically inactive individuals at the time was smaller, and the number has subsequently increased.
Health Foundation analysis of ONS data suggests that a 10% return to work figure is a more credible indicator and we have therefore used this in Scenario 5 for comparison.
Based on the 16% figure, we estimate that if no additional job uptake takes place, the cost of the policy is £911m.
The deadweight figure significantly affects the assumptions in the model. A lower, more realistic deadweight figure reduces the number of total jobs needed to deliver fiscal savings.
Replacement Rate
In addition to the deadweight level, we have assumed that the incentive might cause those on long term sickness/disability benefits to be preferred over others already in employment or those out of work on benefits without additional incapacity benefits.
For all those ‘replaced’, we have assumed that 100% will instead go onto or continue on Universal Credit. We have not factored in other potential benefits, but 100% receiving UC is a pessimistic scenario.
In all five models we have chosen a cautionary 50% replacement figure, which we believe to be conservative.
In reality, with circa 816,000 vacancies, a relatively tight labour market (4.4% unemployment) and strong private sector wage growth (most recent 6.2%), it can be argued that:
The policy intervention is likely to support filling of vacancies.
The vacancies and tight labour market will result in significant numbers of those being ‘replaced’ finding alternative work, rather than going onto Universal Credit.
In relation to the fairness of this policy, the Government has identified the promotion of movement from economic inactivity due to incapacity into work as a key priority.
It has already proposed changes to assessment criteria and further investment in Access to Work to provide additional tailored support to help this group back into work.
This intervention adds a third element: wage subsidy. In the case of the target cohort, the wage subsidy allows for a ‘on-ramp’ into work, in case there is a longer adjustment period for employer and employee for full productivity to be obtained.
Nature of Work
We have costed this policy based on every individual going into full-time work. This applies to both the deadweight figures and the additional uptake of jobs.
We have assumed all workers are homogenous: all earn the same wage (National Living Wage for 21 year olds and above, £12.21), all work 37.5 hours per week, 52 weeks of the year.
If the average worker earned more than National Living Wage, the policy would have higher returns. Likewise, if this results in employment growth for part-time roles or minimum wage jobs, the returns will be lower.
We have assumed NI Category A.
We accept that those moving off these benefits into work may benefit from part-time working options. Our assumptions are based on this being preliminary and indicative modelling, and we intend to develop a more sophisticated set of assumptions for the full paper.
Welfare Benefit Assumptions
We have assumed that the welfare benefits otherwise received by those eligible for the policy are Universal Credit, Incapacity Benefits and Employment Support Allowance (ESA).
The figures are based on the levels of benefits received prior to the introduction of the Department for Work and Pensions’ Green Paper, and the Chancellor’s Spring Statement. We will re-model ahead of publishing our full research paper.
The ESA calculations include the lower rate during the 13 week assessment period.
We have used a total monthly Universal Credit for a single person over 25, which is £393.45, with an additional £416.19 for incapacity benefits, bringing a total annual allowance of £9715.68 (source).
Average employment and support allowance is £5,636 per annum, calculated from 13 weeks at assessment rate then 39 weeks in either work-related group or support group (calculated average of the two groups, source).
We have assumed that all long-term sick people that enter employment via the NICs Employer Holiday have been in receipt of Employment Support Allowance.
We have not used PIP data as part of the calculation of savings since these are not means-tested and are eligible for people in and out of work.
Tax assumptions
In our modelling we have made a cost benefit analysis of the Employer NICs Holiday before it is due to rise to 15% on 6 April 2025. We used the current figure of 13.8% Employer NICs in our costings.
We will re-model ahead of publishing our full research paper.
Incentive to go onto Benefits
We have not assumed that there will be an increase in successful applications for incapacity benefits due to this policy intervention. The Government’s current proposals are to tighten eligibility criteria, making this outcome highly unlikely.
