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The chancellor may have promised to put pounds into workers’ pockets in her first budget, but higher taxes on employers’ payrolls will also fill the Treasury’s coffers – and could cost some people their jobs.
In the biggest tax rise measure unveiled on Wednesday, Rachel Reeves hopes to raise £25bn by increasing the national insurance rate employers pay on staff salaries from 13.8 per cent to 15 per cent, and applying it to a much larger portion higher income.
This increase may not apply directly to workers’ salaries, but they will certainly feel its financial impact.
When it comes into effect next April, NI’s total bill for hiring a worker on a salary of £36,000 will rise by 25 per cent, according to calculations by Blick Rothenberg. For a worker on £100,000, it will increase by 13.6 per cent. If you were planning on asking your employer for a raise, I wish you luck.
Smaller businesses can offset some of these costs through increases linked to the employment subsidy. The coming months will reveal exactly how other employers plan to pass on or absorb the impact of the tax increase. Wage restrictions, hiring freezes, and reductions to bonus pools and paid overtime could apply.
The main economic test of the policy will depend on whether employers respond by cutting jobs.
The UK’s larger-than-expected 6.7 per cent rise in the minimum hourly wage in April next year is adding to the pressure. The minimum wage for 18 to 20-year-olds will rise to £10 an hour, an increase of more than 16 per cent. This could discourage companies from hiring younger, less experienced workers.
And could we all be less likely to work from home in the future? I wonder if such large cost increases will lead more employers to insist on more presenteeism in the office. Conversely, others might choose to cut costs by going completely remote and eliminating the office altogether.
Employment experts believe that the combination of these measures will push employers to hire more contract workers through umbrella companies instead of hiring them directly. It is estimated that more than 800,000 UK workers already have temporary contacts through these intermediaries, with a significant number working in hospitality, security, education and as IT contractors.
Rebecca Seeley Harris, founder of ReLegal Consulting, points out that the structure of these contracts means workers have both employer and employee national insurance deducted from their main salary. “This will reduce workers’ wages unless they can renegotiate,” he says, noting that the umbrella company industry is still unregulated. We hope Reeves makes good on the threat in his Budget speech to “crack down on umbrella companies that exploit workers”.
The government’s focus on a tax rise for employers means that many of the other rumored tax rises that could have hit our personal finances either failed to materialize in the Budget or were less damaging than expected.
The 25 per cent tax-free pension starting lump sum remains intact. This news has arrive too late due to the enormous wave of panic of those over 55 years of age who chose to withdraw their cash tax-free anticipating that this benefit would be reduced or lost. Outside of the pension package, they will lose the tax-free growth they could have enjoyed on their investments and risk reducing their future retirement funds.
And while defined contribution pensions will come under the scope of inheritance tax in 2027, this is an issue that the next generation will have to address. Yes, it will undo a lot of careful tax planning, but those still working towards their (eventual) retirement will still enjoy the benefits of a higher tax relief on their pension contributions.
The biggest surprise? The eventual thawing of frozen income tax thresholds. We will have to wait until 2028 for these to rise in line with inflation, by which time the IFS estimates that one in five Britons (about 7.8 million people) will be taxpayers at higher rates. It is estimated that a million of them They will pay marginal tax rates of 60 per cent as they enter six-figure salary territory and their personal tax-free allowance is gradually reduced.
This puts even greater risk for workers with young children who lose valuable childcare benefits when one parent’s income exceeds £100,000. Pleasantly, salary sacrifice schemes They have survived the budget. Workers who make higher contributions to their pensions to stay below this tax threshold will also reduce their employer’s NI bill. However, this assumes that the company they work for will not have to sacrifice their jobs.
Claer Barrett is the FT’s consumer editor and author of ‘What they don’t teach you about money‘. claer.barrett@ft.com instagram @claerb