UK businesses face a big tax hike. So what does it mean for workers and the economy?
- Written by Phil Tomlinson, Professor of Industrial Strategy, Co-Director Centre for Governance, Regulation and Industrial Strategy (CGR&IS), University of Bath
Employers in the UK are about to be hit with a hefty tax rise. From April 1 2025, their national insurance contributions are rising[1] to 15% on salaries above £5,000, instead of 13.8% on salaries above £9,100.
Unsurprisingly, business owners are not happy. Since the change was announced last autumn, many have complained about the effect it will have on their ability to invest and hire staff. Care homes[2], supermarkets[3] and GP surgeries are among those who have voiced their concerns, and a recent survey[4] found that 54% anticipate raising prices.
Some industries will be affected more than others. The hospitality sector, for example, expects around £1 billion in additional costs[5] (alongside an inflation-busting minimum wage increase[6], which also comes into play on April 1). Partly because of these changes, manufacturing confidence[7] has already taken a hit, contributing to a decline in overall GDP[8] since the start of the year.
But Rachel Reeves, the UK’s chancellor, has not budged, arguing that she needs to raise £40 billion in tax revenue[9] to fund infrastructure and public services, and to address what she calls a “black hole”[10] in the public finances.
She had previously condemned the Conservative government’s employer national insurance hike in 2022 as a “tax on jobs”[11]. Yet a Labour party manifesto pledge not to raise[12] personal income tax, employees’ national insurance or VAT, has effectively left her with few options.
As a result, the burden has been placed firmly on businesses. But in the UK’s sluggish economy[13], any added cost pressures could push struggling firms into pay freezes and cutbacks.
Others may seek ways to mitigate the national insurance rise through creative accounting[14], by offering salary sacrifice schemes (such as cycle-to-work or electric vehicle purchase programmes) instead of direct wage increases.
Some firms will no doubt explore other cost-cutting measures, such as reducing office space by encouraging more remote work[15]. Or they may shift towards gig economy models[16], where they employ workers as “subcontractors” rather than as salaried staff. Larger firms might even move jobs abroad[17].
Productivity push?
But there could be an upside to all of this. Despite being politically sensitive, there is an economic argument[18] for raising employment costs as a way of driving innovation and productivity. And some enterprising businesses may respond to the financial pressure by investing in labour-saving technology.
For years the UK has relied on a low-wage, loosely regulated labour market[19]. This has allowed businesses to hire and fire with ease, but has also led to persistently low levels of investment[20] and weak productivity growth[21].
Put simply, UK workers are often using outdated tools and equipment, making them less productive[22] compared with their international competitors. Over time, this depresses wages, lowers economic growth[23] (and living standards) and limits funding (through tax raised) for public services.
Raising employment costs may now incentivise businesses to invest in automation and efficiency-enhancing technologies. The feasibility of this shift depends on what economists call the “elasticity of substitution”[24] – the ease with which labour can be replaced by technology while maintaining (or improving) output.
And evidence suggests automation and AI can drive productivity improvements[25] even in traditionally labour-intensive industries. For instance, in social care[26], AI may be used to create personalised treatment plans, while robots could provide patients with physical, social and cognitive support.
So far, the UK care sector has been slow to adopt[27] such technology, lagging behind the likes of Australia, the Netherlands[28] and Japan[29].
Similarly, in hospitality[31], there are opportunities to use AI for predictive ordering and automated waste management. This could help hotels and restaurants reduce food waste, streamline supply chains and improve their profitability. Some businesses are also exploring robotic concierge services[32] and automated customer interactions.
Incentives and stability
To ensure businesses embrace these productivity-boosting innovations, government support is essential. A well-designed industrial strategy is still needed to position the UK at the forefront of the “industry 4.0” technological revolution[33].
Read more: The UK's new industrial strategy is welcome, but here's what is missing[34]
And, critically, businesses also need confidence in the broader economic outlook. Yet with continuing geopolitical uncertainty, trade tensions and fears of a global recession[35], the future feels fragile.
The government’s challenge lies in encouraging businesses to adopt a strategy[36] which ensures that investment in innovation actually materialises, and the benefits emerge swiftly. If businesses fail to adapt, or if productivity gains take too long, then the national insurance hike could just result in higher costs without any boost to growth.
Ultimately, success hinges on whether businesses view this tax rise as a burden to absorb or an incentive to modernise. In the coming months[37] and years, the government will need to show it is willing to offer businesses more support – and improve their confidence levels – if there is to be a revival in investment and productivity.
References
- ^ are rising (www.bbc.co.uk)
- ^ Care homes (www.bbc.co.uk)
- ^ supermarkets (www.bbc.co.uk)
- ^ survey (www.britishchambers.org.uk)
- ^ £1 billion in additional costs (www.theguardian.com)
- ^ minimum wage increase (www.bbc.co.uk)
- ^ manufacturing confidence (commonslibrary.parliament.uk)
- ^ decline in overall GDP (www.ons.gov.uk)
- ^ £40 billion in tax revenue (www.churchilltaxation.co.uk)
- ^ “black hole” (www.theguardian.com)
- ^ “tax on jobs” (labourlist.org)
- ^ not to raise (www.theguardian.com)
- ^ sluggish economy (www.bbc.co.uk)
- ^ creative accounting (www.think-beyond.co.uk)
- ^ remote work (theconversation.com)
- ^ gig economy models (www.investopedia.com)
- ^ abroad (www.reuters.com)
- ^ economic argument (www.theguardian.com)
- ^ loosely regulated labour market (www.theguardian.com)
- ^ low levels of investment (www.ippr.org)
- ^ weak productivity growth (www.productivity.ac.uk)
- ^ them less productive (www.productivity.ac.uk)
- ^ lowers economic growth (www.tandfonline.com)
- ^ “elasticity of substitution” (inomics.com)
- ^ drive productivity improvements (link.springer.com)
- ^ in social care (www.techuk.org)
- ^ slow to adopt (www.htworld.co.uk)
- ^ Australia, the Netherlands (www.caremanagementmatters.co.uk)
- ^ Japan (www.telegraph.co.uk)
- ^ Stock-Asso/Shutterstock (www.shutterstock.com)
- ^ in hospitality (www.revfine.com)
- ^ robotic concierge services (secretldn.com)
- ^ “industry 4.0” technological revolution (www.birmingham.ac.uk)
- ^ The UK's new industrial strategy is welcome, but here's what is missing (theconversation.com)
- ^ global recession (www.cnbc.com)
- ^ adopt a strategy (sloanreview.mit.edu)
- ^ coming months (www.theguardian.com)
