Rises in national insurance contributions and dividend tax are “ill-timed” and a “hammer blow” for companies, according to business leaders.

Organisations including the Federation of Small Businesses (FSB), the Institute of Directors, the CBI, the British Chambers of Commerce and manufacturers’ association Make UK universally attacked the proposal announced yesterday.

Prime Minister Boris Johnson said there would be a 1.25% increase in national insurance contributions (NICs) for employers, employees and sole traders from April next year alongside a 1.25% increase in dividend taxation. It is intended to fund health services and social care.

Mike Cherry, national chair for the FSB, said: “These hikes will have business owners and sole traders feeling demoralised at the point when they’re trying to recover from the most difficult 18 months of their professional lives. For those thinking about starting up, they send completely the wrong message.

“Business owners who have done all they can to retain and support their staff during the pandemic are now being punished for that loyalty with an £11billion increase in NICs, which essentially serve as a jobs tax.

“This regressive levy hits employers and sole traders without meaningful regard for how their business is performing. And this increase will stifle recruitment, investment and efforts to upskill and improve productivity in the years ahead.

“At the same time those running companies, many of whom were left out of pandemic support measures, face a fresh assault on dividend revenue.

“Instead of breaking manifesto promises, we had hoped this administration – which has repeatedly pledged its support for small enterprises – would build on that progress against a backdrop of spiralling input prices, skills shortages, supply chain disruption, the reintroduction of business rates and emergency loan repayments.

“This move marks an anti-jobs, anti-small business, anti-start up manifesto breach. The Government should now increase the Employment Allowance to mitigate the damaging impacts of these hikes on the small firms that make up 99% of our business community.”

Stephen Phipson, chief executive of Make UK, said manufacturers fully supported the need for funding for the NHS and social care but not through an increase in tax on employers and employees.

“Putting a tax on jobs and workers at a time when Government is pulling the furlough scheme is ill-timed as well as illogical.

“Economic history tells us that job cuts are most likely when the economy starts to open again after a downturn because firms need the capital to reset.

“After witnessing large-scale redundancies at the height of the pandemic and the plug being pulled on the furlough scheme, Government should be putting in place measures to protect jobs and incentivise recruitment.

An increase to national insurance would have the opposite effect. As such Government must examine other streams of raising revenue. We need to nurture growth not put an anchor on recovery.”

Kitty Ussher, the new chief economist at the Institute of Directors, agreed that it was bad timing to add to the cost of employing people. “Due to the much-publicised labour shortages, our own research shows that 73% of businesses are already concerned about rising salary-related business costs.

“Businesses do not understand why Government would want to add to the cost of taking on a new employee through an increase in employer national insurance at this of all times.

“National insurance should not be used in place of general taxation. It was established to protect people financially from the risks of being unable to work, based on a contributory system, and it is on that basis that employers also make contributions.

“There is no logic to employer national insurance contributions being used to fund anything else.”

Kitty Ussher, chief economist at the Institute of Directors, also said the increase in NIC was ill-timed as businesses were trying to recover from the pandemic. “It smacks of political opportunism, exploiting public sentiment at the expense of some of the most productive and entrepreneurial segments of the economy.

“The surprise new tax on dividends will yet again target small company directors. Incorporated sole traders and other owner-managers, who relied on dividend income, were the only group of workers that were not supported by government during the pandemic.

“Employees and the self-employed were provided with financial support to tide them over, but this group was not.

“While it may make sense in the long term to align tax rates for all types of income, this government has shown through its actions a total lack of understanding to the very real difficulties faced by owners of the smallest businesses in Britain.”

Lord Bilimoria, president of the CBI, conceded that there was genuine consensus that social care reforms and greater investment were long overdue but said it was also bad timing because businesses face a “substantial” rise in corporation tax in 2023 – the first rise in corporation tax in 47 years.

“After all that business has gone through during the pandemic and the fantastic Government support that followed, now is not the time for tax increases. It’s time to stimulate investment and growth in the economy.

“A national insurance increase will directly hurt a business’ ability to hire staff, at a time when businesses have faced a torrid 18 months and are now fighting crippling labour shortages.

“Government must be wary of heaping further pressure on businesses who will be central to the recovery, particularly by making it more expensive to recruit.

“This autumn will be a critical period if we are to drive a sustainable recovery. The Government must use all the levers it has in its power to encourage more businesses to invest in the months to come and do everything it can to encourage growth.”

On the tax on share dividends, he added: “This is out of the blue so investors, savers and businesses will need time to consider the full implications. Such investment plays a critical role in supporting businesses and enabling growth across the whole economy.”

The British Chambers of Commerce has also opposed the so-called “health and social care levy”. Its head of economics, Suren Thiru, said: “It will be a drag anchor on jobs growth at an absolutely crucial time. Firms have been hammered by 18 months of Covid-related restrictions and have built up huge debt burdens.

“This rise will impact the wider economic recovery by landing significant costs on firms when they are already facing a raft of new cost pressures and dampen the entrepreneurial spirit need to drive the recovery.

“Businesses generate prosperity, create jobs and support communities. The focus should be on creating the best possible environment for them to grow and thrive so they can sustainably deliver the tax revenue needed to support our public services and the wider economy.”

It has also been announced that Chancellor Rishi Sunak is to present his next Budget, along with the outcome of the 2021 Spending Review, on 27 October 2021.