The 2024 “Autumn Budget,” presented by the UK Chancellor of the Exchequer, Rachel Reeves Philip, included one significant policy announcement: an increase in employers’ National Insurance Contributions (NIC), which will be applicable from April 2025. The move, according to employers, will make the cost of employment more expensive, leading to a situation where companies will have less cash to give pay raises and create new jobs.
British businesses will bear the brunt of Reeves’ 40-billion-pound total tax rise. It means more than half of the tax rises in the Budget will be paid for by employers, with the increase in the amount they pay in National Insurance on workers’ wages expected to generate 25 billion pounds a year.
“There are two significant increases around NI that employers will have to consider, both of which are due to apply from 6 April 2025: Employer NIC will increase from the current rate of 13.8% to 15%, and the per-employee threshold at which employers become liable to pay NI will be reduced from GBP 9,100 per year to GBP 5,000 per year,” stated an analysis from insurance brokerage major Lockton Companies.
The increase in employers’ social security contributions has put many business owners on edge. The largest tax increase package in thirty years was part of Reeves’ first budget, which she characterised as a “once-in-a-generation” move to modernise the economy and invest in public services.
Although there were some exemptions or relief for the smallest firms, the increase in National Insurance will have major cost implications for established businesses, as they will have to pay higher minimum wages, higher business rates, and bear the cost of adapting to new workers’ rights under new laws. Firms have warned that such extra costs could ultimately impact the Keir Starmer government’s goal of growing the UK economy. However, according to Reeves, the “only way” to drive growth is through investment, warning that “there are no shortcuts.”
“The rate that employers pay in contributions will rise from 13.8% to 15% on a worker’s earnings above 175 pounds from April. The threshold at which employers start paying the tax on each employee’s salary will be reduced from 9,100 pounds per year to 5,000 pounds. However, the Chancellor said she would extend the Employers Allowance—the amount employers can claim back from their National Insurance bill—from 5,000 pounds to 10,500 pounds,” stated a BBC report back in October 2024, when the “Autumn Budget” had just been passed by the British Parliament.
From April 2025, the minimum wage for 21-year-olds, known officially as the National Living Wage, will rise from 11.44 pounds to 12.21 pounds. For 18 to 20-year-olds, the minimum wage will rise from 8.60 pounds to 10 pounds.
Apprentices will see their pay jump from 6.40 pounds to 7.55 pounds an hour. The current 75% discount to rates, due to expire in April 2025, will be replaced by a discount of 40%, up to a maximum of 110,000 pounds. It still means that many businesses will see their business rates more than double. Also, plans to upgrade workers’ rights will cost businesses up to 5 billion pounds a year to implement, according to the Keir Starmer government’s own analysis.
Tough Times For Companies Ahead
There are concerns that the rise in taxes will end up hitting workers and consumers. In some cases, companies could pass on the increased costs they face through higher prices; however, employee wage rises could be restricted as employers look for savings. Other tax revenues could also be hit if firms make smaller profits and people receive smaller pay packets.
The Office for Budget Responsibility, the UK’s official economic forecaster, said it assumed “most” of the increased National Insurance cost would be passed on to workers and consumers from employers through lower wages and higher prices. Leading business groups, however, said as soon as the “Autumn Budget” was released in October 2024 that the policy document was a “tough” one for ventures, pointing to the National Insurance hike as a blow to the ability of firms to invest.
“At first blush, there is precious little in the government’s first Budget which offers anything other than short-term pain,” said Roger Barker, director of policy at the Institute of Directors. Rain Newton-Smith, chief executive of the CBI (Confederation of British Industry), which claims to represent 170,000 firms, said the burden on business would make it “more expensive to hire people or give pay rises.”
The Keir Starmer government is pledging to be both “pro-business” and “pro-worker” in its policy decisions, and Reeves, during the past year, confirmed Income Tax, National Insurance for employees, and VAT would not be increased.
She also offered some relief to small firms by uplifting the amount they can claim back off their National Insurance bill. However, Reeves also said the 75% relief on business rates, which are charged on most non-domestic properties such as shops, offices, pubs, and factories, and were due to expire this April, would be replaced by a 40% discount for retail, hospitality, and leisure companies.
According to commercial real estate intelligence firm Altus Group, the average shop’s business rates will jump from 3,589 pounds to 8,613 pounds in April 2025, while pub costs will increase from 3,938 pounds to 9,451 pounds. Restaurants’ average business rates bills will rise from 5,051 pounds to 12,122 pounds.
Hiring Affected
The so-called “tax wedge,” or the gap between employers’ labour costs and workers’ take-home pay, is smaller in Britain than in its European counterparts due to decades of government policy that prioritises hiring. However, a push to reduce that gap would not be easy.
While some businesses intend to increase automation—for example, retailer Currys has announced that it will switch from paper price labels to electronic labelling—the majority of employers are thinking about reducing hiring and delaying wage increases in response to Reeves’ budget.
According to Steve Hardeman, owner of Clevedon Fasteners, a company that manufactures parts for engineering and construction companies, the social security and minimum wage increases would be the equivalent of hiring two more employees for his current staff of 28.
Rory O’Keefe, commercial director of Europlaz, a company that makes medical devices, told Reuters that his company would take three students on temporary placements rather than hiring graduates and had hired two employees on fixed-term rather than permanent contracts.
The impact of the budget changes is being closely watched by the Bank of England (BoE). After three gradual interest rate cuts since August 2024—fewer than in the US and the Eurozone—Governor Andrew Bailey and his colleagues say they anticipate continuing to lower rates.
“The BoE emphasised the uncertainty looming over the economy. A worldwide trade war is one of them, and it might lead to a slowdown and lower inflation. However, according to DotBoE surveys of British businesses, the most common responses to Reeves’ budget are higher prices and an attempt to absorb the hit to profit margins. That risk increased when US President Donald Trump announced a sharp increase in tariffs on imports from around the world,” Reuters noted.
“The central bank ran the risk of underestimating the price impact of the changes,” according to former BoE economist Rob Wood.
These changes were expected to add half a percentage point to an inflation rate that was already being pressured by other one-time costs and could even push it above 4% later in 2025, up from just under 3% at the moment. Although it would more than double the BoE’s 2% target, it would still be far lower than the inflation rate of 11% in 2022.