Business
Will Drysdale, Senior Reporter, Business & Accountancy Daily
An employee on minimum wage is set to cost an employer £2,583 more per year due to upcoming rises in employer’s National Insurance and minimum wage
From April, employers can expect to pay 60% more in National Insurance in the 2025-26 tax year due to NIC rises announced at the Budget.
In 2024 an employer paid £1,617 for each full time employee on minimum wage, this will increase to £2,583 from 1 April, reveals analysis by the Centre for Policy Studies (CPS).
One low wage employee will now cost £24,806 per year.
Research from the CPS has labelled the rises ‘one of the most damaging’ tax increases in British history, with businesses already halting their hiring plans and putting off further investments.
Robert Colvile, Centre for Policy Studies director, said: ‘Labour claims to understand the importance of growth and to have made it a priority.
‘But it was clear from the moment of the Budget that taxing jobs and work would damage the economy. As this analysis shows, the changes to employer’s National Insurance and the increases in the minimum wage make it disproportionately more expensive to employ those at the lower end of the wage scale.’
A full-time worker on minimum wage in 2024 earned a salary of £20,821, paying £1,650 in income tax over the year. From the next tax year, the same worker will earn £22,222, a rise of £1,401. However, the amount of income tax paid on this also increases by 17% from £1,650 to £1,930.
Even though a minimum wage employee will be £1,401 better off per year, income tax will absorb £280 of this, £1,930 in total. This leaves a minimum wage employee with £20,292 after income tax, up from £ 19,171 in 2024.
On top of this, National Insurance contributions (NICs) will also increase for an employee, from £659 in 2024, to £771 in 2025, meaning the employee will pay £2,701 in total, earning £19,521 after income tax and NICs as frozen income tax thresholds bite.
In 2024 it cost businesses £1,617 in NICs per full time employee on minimum wage, this flies up by over £900 after the NICs’ increase to £2,583.
Each week an employer will be forking out 60% more in NICs than the previous year, increasing from £31 per week, to £50 per week.
It is not only NICs and minimum wage rises businesses will be dreading, lowering the rate when employers begin to pay NICs to £5,000 is also set to cost £966 per employee.
Daniel Herring, CPS tax and fiscal researcher, said: ‘The more of an employee’s salary is owed in tax – whether paid by the employee or directly by the employer – the more costly it is for businesses to create and sustain jobs.
‘Increasing taxes on employment harms businesses and workers alike. By making it more expensive to employ people, the hikes in employer’s National Insurance disproportionately affect the lowest paid or those who are looking to move back into work after being economically inactive.’
Rachel Reeves, and the current Prime Minister has said there will be no further tax increases in the coming year, but customers of investment firm AJ Bell do not believe this. In fact, 83% of the 1,530 clients the investment firm surveyed are sceptical about government pledges not to increase tax.
Laith Khalaf, head of investment analysis at AJ Bell said: ‘The economic tightrope that Rachel Reeves has been attempting to walk over the past six months is undoubtedly tough, and she is in no enviable position.
‘But if Labour is ever going to realise its central ambition of turbocharging economic growth, it needs to ensure the British public feel secure enough about their personal finances to start spending and investing.’
When questioned by MPs on the Treasury Committee after the Budget, Reeves said: ‘This was a once in a parliament reset – we will never have to do a Budget like this again.
‘I won’t write five years’ worth of Budgets now, but we have drawn a line and put the public finances on a clear trajectory.’
To deal with the rise in employer NI rates, Reeves told MPs: ‘Businesses are creative and show ingenuity, and businesses will improve productivity.
‘Small businesses struggle most with employer NI so we increased the employment allowance to £10,000 for a million smaller businesses so they will be paying no more or no less than they were before.’
