Retailers and hospitality businesses are seeing an unprecedented rise in employees’ tax bills this year, due to Chancellor Rachel Reeves’ decision to increase employers’ National Insurance contributions coupled with the minimum wage rising above inflation.
New figures compiled by the Center for Policy Studies (CPS) show that the annual cost of employing one full-time minimum wage worker will jump by £2,367 to more than £24,800, of which more than £5,000 will go directly to the Treasury. More than a fifth of the amount companies spend on these employees – 21.3 per cent – will now be swallowed up in taxes, up from 17.5 per cent 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 fees paid by employers and workers themselves – has not exceeded 20 percent so far. . By comparison, in 2015, the figure was just 11 per cent for minimum wage roles, when a rise in the personal allowance led to lower taxes overall.
Rupert Colville, the Labor Party director, criticized Labour’s approach, warning that imposing heavier taxes on jobs would damage Britain’s growth prospects. “Labour claims to understand the importance of growth and make it a priority. But it was clear from the moment of the Budget that taxing jobs and work would damage the economy.”
The sectors most affected will be retail and hospitality, which rely heavily on low-paid, often part-time, employees. Kate Nicholls, chief executive of UKHospitality, urged the government to reconsider: “We are calling for its introduction in April to be delayed to give the Chancellor time to consult with businesses on measures that could protect businesses and team members.”
Meanwhile, the British Retail Consortium has estimated that the new budget measures will cost the sector an additional £7 billion. This heavier burden comes at a time of declining turnout, which fell for the second year in a row to 2.2 percent below 2023 levels.
Helen Dickinson, chief executive of the BRC, described the December retail footfall data as “uninteresting”, adding that it “caps a disappointing year for UK retail footfall”.
Business confidence remains fragile, with 71 per cent of leaders surveyed by the Institute of Directors feeling pessimistic about Britain’s economic outlook for 2025. Anna Leitch, chief economist at the Institute of Directors, cited “earnings uncertainty” as a major barrier to investment, noting Nearly a quarter of business leaders plan to make no investments at all this year.
The increase in employers’ National Insurance contributions also has a disproportionate impact on low-income earners, whose taxable salaries are pushed above new thresholds more quickly than average salaries. A typical employer’s National Insurance bill for a full-time minimum wage employee will jump from £1,617 to £2,583 this year – a 60 per cent increase, CPS analysis shows.
Furthermore, the national living wage rose by 6.7 percent, worsening the overall cost of hiring employees. “By making it more expensive for people to employ, increases in employer national insurance disproportionately impact lower wages,” said Daniel Herring of the CPS.
The Treasury defended the budget measures, stressing the need to restore economic stability. A spokesman for the Independent Office for Budget Responsibility noted that this would lead to “lower unemployment and higher wages over the coming years”, while noting that “more than half of employers will either see a reduction or no change in their National Insurance bills”. The spokesman added that the government’s plan for change aims to “push Britain to build, unlock investment and support businesses so we can improve conditions across the country.”