(Bloomberg) — British business groups warned the country’s new Labor government against imposing a key tax on employers, after Prime Minister Keir Starmer and Finance Minister Rachel Reeves both indicated an increase would be considered in the budget later this month.
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Executives warned on Tuesday that raising payroll taxes – known as national insurance – would hurt economic activity, with particular consequences for the retail and hospitality sectors. That came after both Starmer and Reeves suggested that their election pledge not to increase the NI only applied to the portion paid by employees, and not the rate charged to employers.
“It would be a very damaging way to raise money,” Neil Carberry, CEO of the Recruitment and Employment Confederation, told Bloomberg Radio. “The National Insurance is not a profit tax. It is a tax on activities. It mainly affects labor-intensive companies. These tend to be retailers, hospitality companies, healthcare companies and consumer-facing businesses,” he added, describing the proposal as a “real challenge” for the high street.
The pushback illustrates the tough decisions Reeves faces as she tries to use her budget to fill what she calls a £22 billion ($29 billion) void in public finances this year, without holding back growth or to violate the obligations in the election manifesto that exclude increases. from “working people” to income tax, national insurance and value added tax – the main sources of revenue for the Ministry of Finance.
While Labor might expect the opposition Tories to argue that this would contradict the manifesto’s wording, government officials argue the document left ample leeway to increase payroll taxes on businesses. Furthermore, the Tories attacked Labor during the campaign for not ruling out a rise in the NI for employers.
Reeves has said the tax increases will come in her Oct. 30 budget, and she and Starmer this week gave the strongest indication yet that they are considering increasing the business component of payroll taxes.
“We were very clear in the manifesto that we would not increase taxes on working people,” the Prime Minister told BBC TV on Tuesday, when asked whether the election pledge on national insurance applied to both employers and employees.
The Prime Minister’s language was a repeat of what Reeves told reporters at an international investment summit held in London on Monday, and will be seen as a clear hint that the government is considering the move.
Increasing the key employer national insurance rate by one percentage point would raise £8.45 billion in the 2025-26 financial year, according to estimates published by His Majesty’s Revenue and Customs.
“If we see an increase in national insurance contributions paid by employers, that will increase the cost of hiring someone, of creating a job, and that will make it harder for businesses,” says Rain Newton -Smith, director general of the Confederation of British Industry, told the BBC on Tuesday. She said such a rise would particularly hit businesses “that create a lot of jobs in our hospitality sector, our hotels and our pubs.”
That view was supported by Kate Nicholls, CEO of UK Hospitality. “An increase would particularly affect sectors such as hospitality, where staff costs are the largest operating expense,” she said. “Hospitality companies are much less able to absorb another cost increase, while they are already working on increases in other areas, such as wages, food, beverages and energy.”
Meanwhile, Craig Beaumont, executive director of the Federation of Small Businesses, told Bloomberg that such a tax increase would hit Britain’s one million small employers the hardest.
“It is they who create local jobs and recruit those furthest from the labor market,” Beaumont said. “An increase would mean less growth, an acceleration of the job losses we are seeing in Britain’s small businesses, and downward pressure on wages and pension contributions – all of which has a direct impact on working people.”
Newton-Smith also flagged possible impacts on economic growth and the money the Treasury has to fund Britain’s already overburdened public services. “If these across-the-board increases in workforce costs are not matched by higher productivity, it will be harder for businesses to create the jobs and growth we need to truly fund our public services,” she said.
–With help from Caroline Hepker, Jack Sidders and James Woolcock.
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