- Businesses employing low-wage workers will see a massive hike in their tax bills in 2025
- The Chancellor’s decision to raise employer’s National Insurance has led to a whopping 60% tax increase for businesses employing the lowest paid
- In 2024, an employer paid £1,617 in NICs for each full-time employee on minimum wage. In 2025 they will have to pay £2,583
- Overall, it will cost businesses £2,367 more to employ a full-time worker on the minimum wage than it did in 2024
- Making it more expensive for businesses to hire low-paid workers means businesses will create fewer positions, entrenching the difficulties faced by those looking to get into the workforce
This year will be the most expensive on record for businesses who employ workers on the minimum wage, according to new analysis. Research by the Centre for Policy Studies shows that the tax wedge – the combined amount of tax paid by employees and employers – for those on minimum wage will equate to a shocking 21.3% of salary in 2025.
Since the minimum wage was introduced in 1999, the tax wedge has fluctuated. In 2010, it stood at 18% but the Coalition government reduced this to 11% in 2015, primarily by increasing the income tax personal allowance. Although this increased over time, owing to wages rising faster than the personal allowance thresholds, by 2024 the amount of tax paid per minimum wage worker stood at 17.5% of the salary – still lower than in 2010.
However, the rise in employer’s National Insurance in the Budget and the dramatic reduction in the threshold at which it is paid mean that 21.3% of the cost of employing a full-time worker on the minimum wage will go in tax. Coupled with increases to the minimum wage, it will cost businesses £2,367 more to employ a full-time worker on the minimum wage than it did in 2024, which will have an obvious impact on hiring decisions for the lowest paid.
For higher wage positions, the increased cost of hiring workers translates into lower wages over time. For those on the minimum wage, where salaries cannot fall, businesses will instead hire fewer workers, which limits the opportunities for those in low-paid work and the unemployed who are looking to get back into the workforce.
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.’
Robert Colvile, CPS 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. And 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.’
NOTES TO EDITORS
- ‘Punching Down: How Labour’s jobs tax hits the lowest-paid the most’ is available to download here
- Daniel Herring is the researcher for economic and fiscal policy at the Centre for Policy Studies
- For further information and media requests, please contact Emma Revell on 07931 698246
- The Centre for Policy Studies is one of the oldest and most influential think tanks in Westminster. With a focus on taxation, economic growth, business, welfare, education, housing and green growth, its goal is to develop policies that widen enterprise, ownership and opportunity
Date Added: Friday 3rd January 2025
