Retailers and hospitality firms are staring at an unprecedented rise in staff taxes this year, caused by Chancellor Rachel Reeves’ decision to increase employers’ national insurance contributions, alongside an above-inflation increase in the minimum wage.
New figures from the Center for Policy Studies (CPS) show that the annual cost of employing one full-time minimum wage worker will rise by £2,367 to over £24,800, with more than £5,000 of that going straight to the Treasury. More than a fifth of the amount companies spend on those staff – 21.3 percent – will now be eaten up by taxes, up from 17.5 percent last year.
This represents the largest year-on-year increase in the so-called “tax wedge” since the introduction of the minimum wage in 1999. The wedge – which includes levies paid by employers and by workers themselves – has never exceeded 20 percent until now . . By comparison, in 2015 this was just 11 percent for a minimum wage role, while an increase in personal allowances led to lower taxes overall.
Robert Colvile, chief executive of the CPS, criticized Labour’s approach and warned that heavier taxation on jobs would damage Britain’s growth prospects. “Labor claims to understand the importance of growth and to have made it a priority. But it was clear from the time of the budget that taxing jobs and work would hurt the economy,” he said.
The sectors that will be hardest hit are retail and hospitality, which together are highly dependent on lower-paid, often part-time staff. Kate Nicholls, CEO of UKHospitality, urged the Government to reconsider this: “We are calling for a delay to its introduction in April to give the Chancellor time to consult with businesses on measures that businesses and team members can protect.”
Meanwhile, the British Retail Consortium estimates that the new budget measures will cost the sector a further £7 billion. This increased burden comes at a time of declining visitor numbers, which fell for the second year in a row to 2.2 percent below 2023 levels.
Helen Dickinson, chief executive of the BRC, called December’s footfall “boring”, adding that it was “a disappointing year for footfall in UK retail”.
Business confidence remains fragile, with 71 percent of leaders surveyed by the Institute of Directors pessimistic about the UK’s economic prospects for 2025. Anna Leach, the IoD’s chief economist, pointed to “profit uncertainty” as a key barrier to investment, noting that almost a quarter of business leaders plan to make no investments at all this year.
The increase in employer contributions to national insurance also has a disproportionate impact on lower income earners, whose taxable wages rise above the new thresholds faster than those of average wages. CPS analysis shows that average employer charges for a full-time minimum wage worker will rise from £1,617 to £2,583 this year – an increase of 60 per cent.
In addition, the national living wage will increase by 6.7 percent, further increasing the overall cost of hiring. Daniel Herring, of the CPS, said: “By making it more expensive to employ people, employers’ National Insurance increases are disproportionately affecting the lowest paid.”
The Ministry of Finance defended the fiscal measures and emphasized the need to restore economic stability. A spokesperson pointed to the independent Office for Budget Responsibility’s conclusion that this will lead to “lower unemployment and higher wages in coming years”, while noting that “more than half of employers have seen a reduction or no change in their national will see insurance bills. .” The spokesperson added that the government’s Plan For Change aims to “build Britain up, unlock investment and support business so we can make all parts of the country better off.”