How employer national insurance changes will impact your pay #UKFinance
CashNews.co
Workers will be paid less as a result of the increase in national insurance contributions from employers, chancellor Rachel Reeves has admitted, with experts warning about a prolonged pay downturn. Forecasts show that in 2028, weekly earnings will be just £13 higher than they were in 2008.
The chancellor said she recognised “there will be consequences” to her first budget, which includes £40bn in tax rises, more than half of which come from increasing tax on businesses.
The chancellor on Wednesday unveiled plans to increase employer national insurance contributions (NICs) by £25bn.
Employers’ national insurance contributions will rise by 1.2 percentage points to 15% from April 2025. The threshold at which companies start to pay contributions on an employee’s salary will also be lowered from from £9,100 per year to £5,000.
Asked about increasing NICs for employers, the chancellor told BBC Breakfast: “I said that it will have consequences.
“It will mean that businesses will have to absorb some of this through profits, and it is likely to mean that wage increases might be slightly less than they otherwise would have been.”
Economics experts branded the increase a “tax on working people” which will “definitely” show up in their wages.
Speaking to the BBC Today programme, Paul Johnson, director of the Institute for Fiscal Studies (IFS), said: “My employer might write the cheque for the national insurance contributions, but I’ll effectively be paying for most of it because it’ll cost my employer more to employ me, and so my wages will be less than they otherwise would have been.”
He warned that businesses will pass most costs onto employees, which could result in fewer pay rises and reduced hiring.
Read more: How the UK budget could impact first-time buyers, small businesses and economic growth
James Smith, research director at the Resolution Foundation economic think tank, said the employers’ national insurance tax increase “will definitely show up in wages”.
He added: “This is definitely a tax on working people, let’s be very clear about that.
“Even if it doesn’t show up in pay packets from day one, it will eventually feed through to lower wages.”
The combination of higher inflation and weaker growth stemming from increased taxes on employment, means that real pay is set to stagnate again in the middle of this parliament. As a result, by 2028 real wages are expected to have grown by just over £10 a week over the past two decades.
“This will extend the UK’s long pay stagnation: in 2028, average weekly earnings are set to be just £13 higher than they were in 2008 (adjusted for CPI inflation),” the Resolution Foundation said.
The Office for Budget Responsibility (OBR) forecasts that by 2026-27, some 76% of the total cost of the NICs increase is passed on through lower real wages — a combination of a squeeze on pay rises and increased prices.
The measure could also lead to the equivalent of around 50,000 average-hour jobs being lost, the watchdog said.
The rise in employers’ national insurance will, proportionally, have the biggest impact on firms employing people on low wages.
Cafes, pubs and restaurants, which rely on part-time staff, could see tax bills rise by as much as a combined £1bn because of the changes, UKHospitality warned.
The Resolution Foundation’s analysis said: “The immediate outlook for real pay is far from rosy and, after this budget, has worsened.”
IFS director Johnson added that the Treasury’s revenue expectations with this change are off.
He said: “It is also worth noting that, net, this increase will not actually get the Treasury anything like the £25bn stated on the scorecard.
“As the OBR note, it will result in lower wages, reducing the amount raised from employer NI and reducing employee NI and income tax revenues. That takes the net revenue down to some £16bn. On top of that there will be an effective £6bn of compensation for public sector employers.”
Reeves delivered the biggest tax increase of the past three decades but experts have warned that Labour might need to find more money in future to avoid cuts.
Johnson said: “It’s possible to argue on that we’ll be in a world in which spending rises so much this year and next that no more money will be needed for the next three years of this parliament, but I bet an awful lot that that’s not what’s going to happen, particularly given the problems that chancellor has clearly had selling this to her cabinet colleagues this time around.
Read more: What the budget means for your money
“I suspect we’ll end up with even more spending, possibly considerably more spending than this currently planned, and that will probably mean, unless she gets lucky with growth, more tax rises to come next year or the year after.”
The OBR has predicted the government’s spending measures will provide only a temporary boost to GDP.
Richard Hughes, chairman of the OBR, said that although growth is forecasted to rise to 2% next year, much of this growth is a “temporary sugar rush” from the chancellor’s plans to increase borrowing.
He said: “That delivers a cash injection into an economy which is already pretty close to full capacity. And so you get a stimulus to demand, but pushes it above supply. That puts pressure on interest rates — both in the gilt markets, but also the Bank of England to try and bring the demand back into line of supply and bring inflation back to target.
“In that sense, it proves to be a temporary boost until interest rates and other crowding out effects bring the economy back into line with our view of potential growth, which is around 1.5%-1.75%.”
The Resolution Foundation said the combined impact of benefit cuts, employer national insurance rises and consumption tax changes are felt evenly across the income distribution. The poorest half of households face a 0.8% reduction in their annual income on average, while the richest half face a 0.6% decrease.
While the UK was once known for its high wages, which were much higher than salaries that could be found in many EU countries, things changed after Brexit.
The average UK salary measured in dollars to make comparison easier, stood at $54 891 in 2022. That is below the OECD average and behind countries like Ireland or France.
Read more: Budget hikes taxes by £40bn as NI for employers and capital gains tax raised
As the UK is number 18 on a list of 38 OECD-member countries, is is well behind Luxembourg, Iceland and Switzerland, when it comes to average pay.
The Resolution Foundation said this parliament is set to be the second worst since the war for rising living standards.
It used the OBR forecast to highlight that real household disposable income (RHDI) per person is expected to see only a modest increase of 1.5% between 2024 and 2025, a slight downgrade from the 1.7% projected in March 2024. More concerning is the significant downward revision for later years; the OBR now predicts RHDI per person will grow by a mere 0.4% between 2027 and 2028, down from an earlier estimate of 1.3%, with a similarly modest 0.7% growth expected for 2028-2029.
The think tank said that while any income growth might be seen as positive — especially given that the past parliamentary term saw the worst improvements in living standards since the 1950s — current projections remain disappointing. During the 2019-2024 parliament, RHDI per person averaged an increase of just 0.3% annually. Looking ahead, the forecast for the upcoming term indicates only a marginal rise of 0.5% per year, translating to an overall income boost of £700 per person by the time of the next elections in 2029 (in 2024-25 prices).
This anticipated growth starkly contrasts with the gains seen during the last Labour government. Even the most challenging years from 2005 to 2010 yielded an average annual growth rate of 0.8%, while the overall period from 1997 to 2010 saw a robust annualised increase of 1.9%, resulting in a cumulative income gain of £5,400 per person, even amid the financial crisis.
Choices made by the chancellor will see the overall tax burden reach a record 38.3% of gross domestic product (GDP) in 2027-28, the highest since 1948.
Read more
Download the Yahoo Finance app, available for Apple and Android.