National insurance rise set to hit lower-paid UK jobs hardest #UKFinance

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Rachel Reeves’ increase in national insurance contributions will hit lower-wage, labour-intensive parts of the UK economy hardest, according to an analysis that found the chancellor may need to raise taxes again soon.

The Institute for Fiscal Studies said the decision in the Budget on Wednesday to raise £25bn through an increase to employers’ national insurance contributions increased the risks of job losses for low-paid staff.

This is because most of the extra NI revenue will come from slashing the earnings threshold at which employers start paying contributions, from £9,100 to £5,000. The rate of NICs will also go up by 1.2 percentage points to 15 per cent from April.

Cutting the threshold would raise the cost of employing a worker in the bottom fifth of earners by more than 4 per cent, while the cost of an employee in the top fifth of earners would rise only by about 1.5 per cent, the think-tank said.

Taxes may need to rise even further in just two years if Reeves is to find an extra £9bn a year to avert cuts to public services later in the parliament, the IFS said.

Giving her first Budget on Wednesday, Reeves said her £40bn tax-raising package would lay the foundations for higher growth and better public services — notably the NHS and schools — and lock in financial stability.

On Thursday, she acknowledged her policies could dampen pay growth. She told the BBC that businesses would have to absorb some of the extra cost through profits, and that it was “likely to mean that wage increases might be slightly less than they otherwise would have been”.

Even after the “historically big” tax increases, the IFS said the new government spending was so front-loaded that Reeves would still need to find at least an extra £9bn a year after 2025-26 to prevent real-terms cuts to some areas of public services later in the parliament.

IFS director Paul Johnson said that “given the ambitions of the government and the situation of public services”, the eventual increase was likely to be bigger than £9bn.

Analysis by the Resolution Foundation think-tank reached a similar conclusion. It found that the spending plans Reeves outlined implied £10.8bn of real per person cuts to Whitehall departments without ringfenced budgets by the end of the parliament — sending their funding back to 2015-16 levels.

The main tax-raising measure in the Budget — the increase in employers’ NICs — would on the Office for Budget Responsibility’s estimate not raise “anything like” the £25bn stated on the Treasury’s scorecard, the IFS said, because it would result in lower wages and profits, reducing its net revenue to about £16bn.

The IFS noted that employers in low-paying sectors would be less able to recoup the costs by squeezing wages over time because they are constrained by a rising minimum wage.

The real-terms cost of employing a minimum wage worker would increase by 8 per cent for a full-time employee next year and by 11 per cent for a part-time employee — the sharpest rise on record, the think-tank said.

Isaac Delestre, IFS research economist, said the increases in the cost of employment made it “worth worrying” about job losses, as well as the increased incentives to shift towards hiring self-employed contractors.

Employers are warning that they face further pressure because of the 6.7 per cent increase in the national living wage from April 2025, as well as employment law reforms designed to boost workers’ rights.

Official estimates suggest the government’s package of workplace reforms will cost business up to £5bn a year, with the biggest impact on low-paying sectors such as hospitality.

Overall, the combined impact of benefit cuts, employer NIC rises and consumption tax changes will be felt evenly across the income distribution, according to the Resolution Foundation.

The poorest half of households will experience a 0.8 per cent reduction in their annual income, while the richest half face a 0.6 per cent decline, the think-tank said on Thursday.

Despite concerns about where the burden of the tax rises will fall, Reeves won the backing of the IMF for her fiscal strategy. The fund said it supported the “envisaged reduction in the deficit over the medium term”, which is achieved by “sustainably” raising revenue.

Reeves acknowledged she could yet be forced to raise revenues higher in future, after her Budget pushed the tax burden to a new record of 38.2 per cent of GDP.

In an interview with Sky News, she said: “I’m not going to make a commitment to never change taxes again. That would be irresponsible. But this is a once-in-a-parliament Budget.”

Conservative shadow chancellor Jeremy Hunt said Reeves’ tax rise represented “the biggest assault on our economic competitiveness since the 1970s” and would backfire.

Richard Hughes, OBR chair, told the BBC that the £25bn increase in NICs would feed through to workers. “Putting up taxes on payroll is bad for labour supply,” he said.

Hughes noted that while the increase in state spending over the next two years would temporarily boost GDP, growth would return to a rate of about 1.5 per cent towards the end of the parliament.

He said this reflected the fact that the economy was running at close to full capacity and that some of the extra public investment — funded by a wave of new borrowing — would crowd out private investment.