Punching Down

• 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.