Reeves’ £25bn national insurance tax raid has arrived. What happens now?
Sorry, Lionel Richie. Businesses aren’t feeling easy like a Sunday morning. The new tax year is here. And Chancellor Rachel Reeves’ £25bn national insurance tax raid has fallen on thousands of firms.
From today, employers will pay a tax rate of 15 per cent on salaries above £5,000, down from £9,100 previously.
This secondary threshold for employers’ national insurance contributions (NICs) will remain frozen for three years and then it will increase in line with inflation.
The changes mean nearly a million employers will pay more NICs, with the proceeds contributing to higher government spending on the NHS and education.
There are various measures swirling around on just how much more tax this hike means for employers. ING’s James Smith claims that firms paying employees an average salary face a 27 per cent increase in the amount of tax paid.
The brutal hike to NICs remains an “unknown” on many fronts for firms’ balance sheets.
“Survey after survey have shown it has lowered hiring intentions,” he said.
Any summary of surveys published in recent months will be heavy death music to Reeves’ ears.
A brief overview would go something like: fewer firms are planning to add staff (REC and KPMG), fewer mid-sized firms believing the UK is pro-businesses (Business Leader) and 300,000 companies planning to lay off workers (Iwoca).
These figures have worried, among others, the Bank of England. Its Monetary Policy Committee said the overwhelming evidence of low confidence among businesses “suggests weakness in growth”. The Bank slashed its growth forecast in half in February from 1.5 per cent to 0.75 per cent.
‘Costs will have spiralled by £7bn’
One of the hardest hit sectors will be retail, which employs some one and a half million part-time workers. This is a drop of 200,000 since 2018 but taxes are could now send the number of part-time workers further downwards. Representatives at the British Retail Consortium (BRC) say the changes will cost firms more than ten per cent more on average as entry-level roles come under greater strain.
“When coupled with the new packaging tax in October, retailers’ costs will have spiralled by £7bn in a single year,” BRC chief executive Helen Dickinson said on the day the tax hike came into force.
“It will be part-time jobs which take the biggest hit. While the cost of employing someone in a full-time entry-level position rose by over ten per cent, for a part-time worker it is over 13 per cent.”
Small businesses escape relatively unscathed – but ‘relatively’ is doing the heavy lifting. As a sweetener to add to her tax hikes, Reeves announced an increase to employment allowances at the Autumn Budget. National Insurance tax bills for the majority of small businesses are actually set to fall. But many are still fearing other headwinds.
“Small business confidence is at its lowest level since the first year of the pandemic, and the business tax burden is at its highest for seventy years,” Federation of Small Businesses (FSB) policy chair Tina McKenzie said.
“The rise in employer national insurance, combined with the raft of extra legislation coming down the track in the Government’s Employment Rights Bill, means that both the cost and risk of giving someone a job are increasing. The result of that will be fewer jobs.”
‘You just get used to these costs’
Reeves’ taxes conclude a week which may go down in history as “Awful April”: higher energy and water bills, rising national minimum wages, President Trump’s tariffs and now higher employers’ national insurance contributions.
In other words, the tax hikes could not come at a worse time.
“This hike in employers’ national insurance contributions will weigh on businesses in the capital at a time when they are facing higher costs, above target inflation and rising trade barriers due to US tariffs,” Muniya Barua, deputy chief executive at BusinessLDN, said.
Can businesses do anything about it all?
“You just get used to these costs,” the owner of a small business, a winter clothing seller, told City AM. “You get used to this constant drip-feed of challenges.
“I think the problem for a lot of businesses is when too much comes too soon or at the same time, and that’s probably an issue like now.”