UK Chancellor of the Exchequer Rachel Reeves presents the budget to Parliament outside 11 Downing Street on Wednesday, October 30, 2024 in London, England.
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LONDON — British business feels pain after Finance Minister Rachel Reeves speaks Generous tax increase budgetAnalysts warned the measures could slow hiring and push up inflation.
increase to national insurance Payroll tax paid by employers is the biggest tax increase so far announced on Wednesday, with Reeves predicting the move will add 25 billion pounds ($32.3 billion) a year during parliament.
Under the new rules, employer NI will increase by 1.2 percentage points to 15% from April 2025, while the level at which employers start paying workers NI will drop from £9,100 to £5,000.
The much-anticipated employer tax allows Reeves to deliver on the Labor government’s manifesto pledge not to raise taxes on “working people” while going some way to plugging what she calls a £22bn “black hole” in public funds.
But business and industry analysts and the opposition Conservative Party criticized the move as disingenuous, saying it would ultimately hit workers by limiting companies’ ability to raise wages and recruit. They say this will in turn undermine the government’s pro-growth agenda.
This is a false dichotomy.
Roger Buck
Director of Policy Department, Institute of Directors
Roger Barker, policy director at the Institute of Directors, a professional network for business leaders and entrepreneurs, described the tax burden as “bigger than expected” and a “significant blow” to businesses.
“It’s a false dichotomy,” Buck said Wednesday after Reeves made the announcement. Barker added: “The impact of rising national insurance costs will hit profits in the short term and then lead to lower wages and lower employment.”
‘Business budgets are tough’
Businesses will also face higher costs of employing minimum wage workers from next April, with Reeves confirming an increase in the UK’s minimum hourly wage on Wednesday.
The minimum wage for those aged 21 and over will rise by 6.7% to £12.21 an hour, while for those aged 18 to 20 it will rise by 16% to £10. At the same time, the overall corporate tax threshold will remain at the upper limit of 25%.
Reeves said small businesses would be exempted from the biggest impact of the changes, with the employment allowance increasing from £5,000 to £10,500, which she said would allow companies to employ up to four minimum wage workers on a full-time basis without having to pay NI to the employer.
However, industry data suggests these measures will do little to support the vast majority of businesses in the country. 5.5 million Small and medium enterprises.
A coffee sign outside a cafe in the City of London on August 28, 2024 in London, England.
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Andrew Martin, CEO and founder of SMEB, a payments platform for small and medium-sized enterprises, said: “This will put another huge pressure on business owners who are already facing severe cash flow problems and increased operating costs.”
Ryan Newton-Smith, chief executive of business interest group the Confederation of British Industry, described it as a “tough budget for business”.
“While the Corporation Tax Roadmap will help create much-needed stability, increases in National Insurance contributions and other increases to employers’ cost base will increase the burden on businesses and hit the ability to invest, ultimately making it more expensive to employ or give staff more money. Great salary increases,” Newton-Smith said.
economic impact
The Office for Budget Responsibility, a government-funded but politically neutral agency that evaluates the Treasury Department’s fiscal decisions, said Reeves’ series of tax increases and public spending measures are likely to boost economic growth in the short term, but will also Push up inflation. This is because companies can pass on additional costs to consumers by raising product prices.
Andrew Sheets, Morgan Stanley’s global head of corporate credit research, echoed that sentiment in an interview with CNBC on Thursday.
“That may improve our short-term growth forecast for the UK, but it may also put a little bit of upward pressure on inflation,” he told CNBC’s “Squawk Box Europe” on Thursday.
Perhaps the Bank of England will cut rates more slowly than we originally thought.
Andrew Sheets
Global Head of Corporate Credit Research, Morgan Stanley
Goldman Sachs on Thursday raised its UK core inflation forecast by 0.2 percentage points to 2.5% by December 2025, noting the impact of changes in NI’s contribution. The report said that as the impact of the fuel tax freeze has eased, the overall inflation rate is expected to rise slightly by 0.1% to 2.3% by the end of next year.
The bank also raised its 2025 gross domestic product (GDP) forecast to 1.6% from 1.5%.
Analysts including the UK Budget Office said Wednesday’s announcement could lead the Bank of England to slow the pace of monetary easing, which would keep borrowing costs for businesses high. The market currently expects an 80% chance that the central bank will cut interest rates by 25 basis points at next week’s meeting.
Morgan Stanley’s table noted: “Perhaps the Bank of England will cut interest rates at a slower pace than we first thought.”
Goldman Sachs said it expected the Bank of England to continue cutting interest rates next week, but added that Reeves’ plan could “reduce the urgency of successive cuts in the near term” and delay its forecast for a rate cut in December.
“Looking ahead to 2025, we maintain our forecast for consecutive interest rate cuts from February as we still expect inflation to cool significantly and UK interest rates to remain significantly constrained. That said, we now forecast a cut in Bank Rate in November 2025 To 3% (previously 2.75%), Goldman Sachs reports that there is more uncertainty in our baseline forecast.
