UK business has reacted with dismay to the 1% increase in employers' National Insurance (NI) contributions announced by Chancellor Gordon Brown in his Budget.

The last thing manufacturers needed from the Budget was a major hit to their cost base Martin Temple EEF

"The last thing manufacturers needed from the Budget was a major hit to their cost base," said Martin Temple, director general of the Engineering Employers' Federation.

More positive measures such as a research and development (R&D) tax credit for large companies at 25% and tax cuts for smaller businesses were overshadowed by the increase in NI contributions.

"Whilst we welcome the R&D tax credit and the measures for small firms, these will provide minimal benefit compared to additional costs," added Mr Temple.

Cost burden for business

The 1% increase for employers is expected to add up to more than �3bn.

Mr Symonds: Pharma companies are lucky

The Confederation of British Industry has described the increase as a tax on jobs because it will make employers more reluctant to make hires.

Manufacturing will particularly hit because the industry is very labour intensive, says Brian Yeomans, head of UK corporate tax at accountancy firm Andersen.

The pharmaceutical company, AstraZeneca, is also anticipating a large tax bill because it employs 12,000 people in the UK.

"It will probably have a bigger effect than a 1% increase in corporation tax because we are such a big employer in the UK," Jon Symonds, chief financial officer, told BBC News Online.

He added that AstraZeneca is more fortunate than most businesses because the NI contributions increase will be offset to some extent by the R&D tax credit.

Some cheer for small companies

The UK's small businesses will also see an offset to the NI contributions increase with cuts in corporation tax.

Mr Yeomans: Only very small companies will benefit

"The chancellor has acknowledged the importance of workforce development amongst small firms," said Anthony Goldstone, president of the British Chambers of Commerce, shortly after Mr Brown made his speech.

Mr Brown laid great emphasis in his speech to the House of Commons on encouraging greater enterprise and providing better conditions for small businesses.

Among the changes announced, he said that the tax rate for small companies with profits of �50,000 to �300,000 would be cut from 20p to 19p in the pound.

I am thinking of retiring and starting up a brewing company in the West country Engineering firm managing director Russell Luckock

He has also reduced the starting rate for taxable company profits of less than �10,000 from 10p to zero.

Alan Woodfield, chairman of Hydrapower Dynamics, an engineering and consultancy firm in the Midlands, praised the Budget for its support of entrepreneurs.

"They are the engine of growth in the future," he said.

Caught in the middle

However, Andersen's Mr Yeomans pointed out that only very small companies would benefit strongly from these tax cuts.

Mr Luckock: Plans to set up a brewery

For example, AE Harris, an engineering firm in Birmingham with turnover of about �4m-5m, falls outside these tax bands.

"I am thinking of retiring and starting up a brewing company in the West country," quipped managing director Russell Luckock, referring to Mr Brown's tax breaks for small brewers.

He also added that the increase in NI contributions would immediately wipe �15,000 off his bottom line.

"There was nothing in that Budget to tackle the root cause of the problem for manufacturing, namely the strength of the pound," he added.

Less form filling

Traditionally, small and medium-sized businesses have complained about the increase in red tape since the Labour government was elected.

Mr Brown seemed to acknowledge this criticism with his announcement that small businesses would now enjoy a flat rate of taxation, in place of VAT, which currently has to be recorded on each purchase and sale.

Half a million small businesses with turnover of less than �100,000 a year will benefit.

"This will save time and form-filling," Mr Brown said.

From April 2003, this new measure will apply to almost half of all small businesses, with turnovers of less than �150,000.

In addition, small companies will be given cash help to move administration of tax credits and payroll online.

Tax modernisation

Despite criticism of the NI contributions increase, Mr Brown's efforts to modernise the tax treatment of intellectual property did not go unheeded by big business.

AstraZeneca's Mr Symonds said that the modernisation would make the UK more competitive.

"The UK tax system now recognises various different forms of intellectual property, in addition to patents, such as marketing and distribution rights," he said.

He was also "genuinely pleased" by the R&D credit which came in five percentage points higher than expected at 25%.

"It is a sensible strategic move by the government to make the UK more attractive," he said.

David Marshall, director general of the Society of British Aerospace Companies, also praised the R&D credit.

"It will be of direct benefit to high-tech companies and industries such as aerospace and will help the position of UK plc as a world leader."