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The chancellor may have promised to put pounds in the pockets of working people at her maiden Budget, but higher payroll taxes for employers will also line the Treasury’s coffers — and could cost some people their jobs.
In the single biggest tax-raising measure unveiled on Wednesday, Rachel Reeves hopes to raise £25bn by increasing the rate of national insurance that employers pay on staff wages from 13.8 to 15 per cent, and applying it to a much bigger slice of earnings.
This increase may not be applied directly to the pay packets of working people, but they will certainly feel its financial impact.
When it kicks in next April, the total NI bill for employing a worker on a salary of £36,000 will increase by 25 per cent, according to calculations by Blick Rothenberg. For a worker on £100,000, it will rise by 13.6 per cent. If you were planning to ask your employer for a pay rise, I wish you luck.
Smaller companies may be able to offset some of these costs via linked increases to the employment allowance. The coming months will reveal exactly how other employers plan to pass on or absorb the impact of the tax rise. Pay restraint, hiring freezes, and reductions to bonus pools and paid overtime could all be applied.
The main economic test of the policy will rest on whether employers respond by cutting jobs.
Next April’s larger-than-expected 6.7 per cent increase to the UK’s minimum hourly wage adds to the pressure. The minimum pay rate for 18 to 20-year-olds will rise to £10 an hour — up more than 16 per cent. This could deter firms 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 increased presenteeism in the office. Conversely, others might opt to cut costs by going fully remote and doing away with the office altogether.
Employment experts believe that the combination of these measures will push employers to engage more contract workers via umbrella companies instead of hiring them directly. It is estimated that more than 800,000 UK workers are already on temporary contacts via these intermediaries, with significant numbers 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 headline rate of pay. “This will reduce workers’ pay unless they can renegotiate,” she says, noting that the umbrella company industry is still unregulated. Here’s hoping Reeves makes good on the threat in her Budget speech to “clamp down on those umbrella companies who exploit workers”.
The government’s focus on a tax increase for employers means that many of the other rumoured tax rises that might have affected our personal finances either failed to materialise in the Budget, or were less damaging than expected.
The 25 per cent tax-free pension commencement lump sum remains intact. This news has come too late for the huge rush of panicking over-55s who opted to take their tax-free cash in anticipation that this benefit would be reduced or lost. Outside of a pension wrapper, 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 into the scope of inheritance tax by 2027, this is a problem for the next generation to deal with. Yes, it will undo lots of careful tax planning, but those still working towards their (eventual) retirement will still get to enjoy the benefits of higher rate tax relief on their pension contributions.
The biggest surprise? The eventual thawing of frozen income tax thresholds. We shall have to wait until 2028 for these to increase in line with inflation, by which time the IFS estimates one in five Britons — some 7.8mn people — will be higher rate taxpayers. It is estimated that one million of them will be paying marginal tax rates of 60 per cent as they enter six-figure salary territory and their tax-free personal allowance is tapered away.
This is even more of a cliff edge for workers with young children who forfeit valuable childcare benefits when one parent’s income passes the £100,000 mark. Pleasingly, salary sacrifice schemes have survived the Budget. Workers who make higher pensions contributions to stay below this tax threshold will also cut their employer’s NI bill. However, that assumes that the company they work for will not have to sacrifice their job.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. [email protected] Instagram @Claerb
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