The cost of employing low-wage workers will hit a record high in 2025, according to an analysis by the Centre for Policy Studies.
The think-tank claims that businesses will create fewer positions because of a 60% increase in taxes due to impending rises in employer national insurance contributions and a lower threshold at which it is paid.
In 2024, an employer paid £1,617 in NICs for each full-time employee on the minimum wage, it points out, while in 2025 it will have to pay £2,583. This means it will cost businesses £2,367 this year to employ a full-time worker on the minimum wage.
The Centre for Policy Studies said that the “tax wedge” (the portion of a salary given over to tax) has fluctuated since the minimum wage was introduced in 1999. In 2010, it was 18%, and in 2015 went down to 11% when the Coalition government increased the personal allowance on tax.
Cost of employment
This year it will rise to 21.3% of salary, it argues, up from 17.5% last year. Businesses also face a rise in the minimum rate in April, when the national living wage increases from £11.44 to £12.21 per hour.
The Treasury is also gradually aligning wage rates for 18- to 20-year olds and over-21s so there is one single adult national living wage, which could increase costs over time.
“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,” said Daniel Herring, tax and fiscal researcher at the Centre for Policy Studies.
“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.”
Kevin Poulter, employment partner at law firm Freeths, said the increased costs could stymie growth for small businesses and start-ups.
“That said, National Living (minimum) Wage increases happen every year and many businesses choose to enhance pay further, including through commitments to the voluntary real Living Wage, bonuses and worker incentives.
“In some cases, sadly, increased labour costs may lead to cuts to the workforce through redundancies, recruitment and pay freezes. Businesses which rely on large numbers of lower paid employees, such as manufacturing and hospitality, will feel the hit the most.
“This comes at a time when competition from countries offering cheap labour remains high and opportunities for offshoring work will hit the UK workforce the hardest,” Poulter added.
Last month, the CIPD warned that employers would need more support to prevent job losses as the cost of running a business increased.
It urged the government to be aware of the disproportionate impact on smaller businesses, and advocated more guidance for those affected.
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