Rachel Reeves’ decision to hike National Insurance (NI) contributions is set to devastate the UK job market, with up to 100,000 positions potentially on the line as employers grapple with higher costs, according to a stark analysis by Deutsche Bank.
The leading financial institution has warned that the Labour Chancellor’s NI tax increase will force already struggling companies to cut jobs and halt new hires, delivering a blow to Britain’s fragile economy.
The bank’s dire forecast is double the 50,000 job losses projected by the Office for Budget Responsibility (OBR) following Reeves’ Budget announcement.
Businesses ‘Under Pressure’ Amid Payroll Tax Hike
As reported in the Telegraph, Sanjay Raja, a senior economist at Deutsche Bank, sounded the alarm over the impact of Reeves’ tax raid on the labour market. He stressed that increasing the employer’s NI rate will inevitably lead companies to scrutinise their payroll decisions, forcing many to cut costs.
“Given that the increase in NI contributions is ultimately a payroll tax, firms’ payroll decisions will come under significant scrutiny going forward,” Mr Raja noted. “This won’t happen all at once. More likely, we will see declines in hiring and employment growth, with some firms adjusting more immediately to the increase in tax.”
The analysis suggests that the changes could ultimately cost the UK economy over 100,000 jobs as businesses are pushed to downsize or freeze recruitment to absorb the tax hike. This comes as the job market already shows signs of “cracking” under economic pressure, according to Deutsche Bank.
Chancellor’s Plans to Raise £25bn Face Backlash
The Budget, announced by Reeves last month, includes a significant increase in employer NI contributions from 13.8% to 15% starting in April. Additionally, the threshold at which the tax applies will drop from £9,100 to £5,000. While the Treasury anticipates that the changes will raise £25 billion, critics argue that it will impose a heavy burden on businesses already struggling with inflation and economic uncertainty.
Reeves has defended the measure, claiming it does not violate Labour’s manifesto pledge not to increase NI contributions for workers since the rise only affects employers. However, Deutsche Bank has warned that the fallout will ultimately hit employees, as companies are likely to pass on the increased costs to their workforce.
Lower Pay and Higher Prices Expected
The repercussions won’t stop at job losses, with those still in work also likely to feel the pinch. Deutsche Bank projects that the NI hike will slash wage growth, cutting expected pay rises by £5.6 billion. Average pay growth for 2024 is now forecast at just 3.75%, down from the 4.25% previously anticipated.
Meanwhile, consumers are set to face higher prices in shops as businesses attempt to offset their increased tax burden. Deutsche Bank estimates that £6.5 billion will be passed on to customers, potentially driving inflation higher just as it was beginning to stabilise.
“With inflation already set to rise above the Bank of England’s 2% target in the coming months, this tax hike could worsen the cost-of-living crisis for ordinary Britons,” warned the report.
Impact on Business Investment and Economic Growth
The analysis also highlights potential damage to business investment, which could fall by £1.4 billion as firms cut back on capital spending. This is likely to undermine one of Reeves’ key economic goals: to boost Britain’s investment appeal and drive long-term growth.
“By increasing the cost of doing business in the UK, this tax raid risks discouraging investment and stifling economic recovery,” the report concluded.
The Treasury, however, maintains that the NI increase is a necessary step to raise funds for public services and reduce the national debt. A spokesperson for the Department for Energy Security and Net Zero reiterated the Government’s commitment to supporting British families, stating: “Our Warm Homes Plan will make homes cheaper to heat, while we are rolling out green upgrades to drive down energy bills.”
As businesses brace for the changes set to take effect in April, the coming months are likely to reveal just how significant the fallout will be on the UK job market and economy. For now, employers and workers alike are left to navigate the uncertain road ahead.