Research shows national insurance increases will hit lower-paid parts of the UK economy hardest

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Rachel Reeves’ increase in national insurance contributions will hit wage-earning sectors hardest, according to analysis released as the prime minister admitted her policies could slow wage growth. low and uses a lot of labor in the British economy.

The Institute for Fiscal Studies found that the decision in Budget Cutting the income threshold at which businesses must make their first NI contribution from £9,100 to £5,000 will have huge consequences for employees as well as employers.

This measure would increase the cost of hiring a worker in the lowest income group by more than 4%, while the cost of hiring an employee in the highest income group would only increase by about 1.5%. Thursday.

This is despite the Labor government’s commitment to ensure that the costs of fixing the public finances fall on “those with the broadest shoulders”.

Reeves announced tax increases of more than £40 billion in his first Budget on Wednesday, including a £25 billion increase in employer NI contributions, which will rise by 1.2 percentage points to 15% from from April.

She said this financial event would lay the foundations for higher growth, better public services – especially the NHS and schools – and ensure financial stability.

On Thursday, Reeves told the BBC that businesses would have to absorb some of the extra costs through profits, adding that it “could mean that wage increases could be a little lower than normal.” with reason”.

But she cited analysis by the Office for Budget Responsibility which forecasts household incomes will still rise in this parliament. The financial watchdog’s outlook shows real household income per person, a measure of living standards, will rise by an average of just over 0.5% per year over the five-year forecast.

The IFS report found that employers in low-wage sectors will also be less able to offset costs by tightening wages over time because they are constrained by rising minimum wages.

The actual cost of hiring a minimum-wage employee will increase 8% for full-time workers next year and 11% for part-time workers – the sharpest increase in history.

Isaac Delestre, IFS research economist, said rising employment costs were making people “worrying” about job losses, as was the growing push to hire self-employed contractors .

Employers are warning that they face further pressure as the national living wage rises 6.7% from April 2025, as well as labor law reforms designed to boost promote workers’ rights.

Official estimates suggest the government’s workplace reform package will business costs up to £5 billion a yearwith the greatest impact on low-wage sectors such as hospitality.

Overall, the combined impact of benefit cuts, increases in employer NI and consumption tax changes will be felt evenly across the income distribution, according to a separate report from Research organization of the Resolution Foundation.

The poorest half of households will see a 0.8% drop in annual income, while the richest half face a 0.6% drop, researchers said Thursday.

Despite concerns about where the tax burden would fall, Reeves has won the IMF’s backing for his fiscal strategy. The fund said it supports “reducing the expected deficit over the medium term”, achieved by “sustainable” revenue increases.

Reeves admitted she could still be forced to raise higher revenues in future, after her Budget pushed the tax burden to a new record of 38.2% of GDP.

In an interview with Sky News, she said: “I will not commit to never changing taxes again. That would be irresponsible. But this is a once-in-parliamentary Budget.”

Conservative shadow chancellor Jeremy Hunt said Reeves’ increase taxeswith business and the rich to suffer, represents “the biggest attack on our economic competitiveness since the 1970s” and will be counterproductive.

Richard Hughes, OBR chairman, told the BBC that a £25 billion increase in employer NI contributions would be passed on to workers. “Increasing payroll taxes is not good for labor supply,” he said.

Hughes noted that while increased state spending over the next two years will temporarily boost GDP, growth will return to around 1.5% by the end of parliament.

He said this reflects the fact that the economy is operating near full capacity and that some of the additional public investment – financed by a new wave of borrowing – will crowd out private investment.