Budget raises UK taxes to hit rents, boost inflation, warn businesses

LONDON – British businesses are smarting after Finance Minister Rachel Reeves’ bumper tax hike budget, with analysts warning that the measures could slow hiring and push up inflation.

Increasing the National Insurance (NI) payroll tax paid by employers is the biggest revenue-raising measure announced on Wednesday, with Reeves forecast to raise £25 billion ($32.3 billion) a year during parliament.

Under the new rules, employer NI will rise by 1.2 percentage points to 15% from April 2025, while the rate at which employers start paying NI for workers will drop from £9,100 to £5,000.

The much-anticipated employer levy allows Reeves to honor the Labor government’s manifesto pledge not to raise taxes on “working people”, while seeking to plug what he claims is a £22bn public funding “black hole”.

But business and industry analysts – as well as the opposition Conservative party – slammed the move as reckless, saying it would end up hitting workers hard by limiting companies’ ability to boost wages and hire. This, he said, would undermine the government’s pro-growth agenda.

Roger Barker, director of policy at the Institute of Directors, a professional network for business leaders and entrepreneurs, described the tax burden as “more than expected” and a “major blow” to business.

“It’s a false dichotomy,” Barker said when Reeves announced Reeves. “The effects of higher National Insurance costs will have a knock-on effect in the near term before being passed on in lower wages and lower employment,” added Barker.

Businesses will also face higher costs of employing the lowest paid workers from next April, with a rise in the UK’s minimum hourly wage confirmed by Reeves on Wednesday.

The minimum hourly wage for over-21s will rise by 6.7% to £12.21, while the same for 18- to 20-year-olds will rise by 16% to £10. The main company tax threshold, meanwhile, will remain capped at 25 %.

Reeves said small businesses would be protected from the biggest impact of the changes, with the increase in employment allowance to £10,500 from £5,000, which he said would allow companies to employ up to four minimum wage workers full-time without paying NI.

However, industry figures suggest the measures will not be able to support the majority of the country’s 5.5 million small and medium businesses.

“This will be another huge pressure on business owners who are already facing cash flow problems and increasing operational costs,” said Andrew Martin, CEO and founder of SMEB, a payment platform for SMEs.

Rain Newton-Smith, chief executive of the Confederation of British Industry, a business interest group, described it as “a tough budget for business.”

“While the Corporation Tax Roadmap will help create the necessary stability, the increase in the National Insurance Contribution together with other increases in the employer’s cost base will increase the burden on businesses and gain the ability to invest and ultimately make it more expensive to hire people or give them salary increases,” he said. Newton-Smith.

The Office for Budget Responsibility, a government-funded but politically neutral body that evaluates the Treasury’s fiscal decisions, said Reeves’ raft of tax hikes and public spending measures may boost economic growth in the near term but also raise inflation. This is because businesses can pass on additional costs to consumers by increasing the price of their products.

Speaking to CNBC Thursday, Morgan Stanley’s head of global corporate credit research, Andrew Sheets, echoed that sentiment.

“This will probably raise our forecast for growth in the UK in the near term, but it may also put upward pressure on inflation,” he told CNBC’s “Squawk Box Europe” on Thursday.

Goldman Sachs on Thursday raised its forecast for UK core inflation by 0.2 percentage points through 2025, adjusting the estimate to read at 2.5% in December 2025, and cited the impact of changes in NI contributions. Headline inflation is seen rising 0.1% slightly lower to 2.3% by the end of next year, due to the impact of the freeze on fuel duties, it said.

The bank also raised its 2025 gross domestic product (GDP) forecast to 1.6% from 1.5%.

Analysts, including the OBR, said Wednesday’s announcement could now see the Bank of England slow the pace of monetary easing, which will keep business borrowing costs high. The market is currently pricing in an 80% chance that the central bank will cut rates by 25 basis points when it meets next week.

“The Bank of England may be cutting rates a bit more slowly than they thought,” Morgan Stanley’s Sheets said.

Goldman said it expected the BOE to move forward with cuts next week, but added that Reeves’ plan could “reduce the urgency of sequential cuts in the near term,” delaying expectations for December cuts.

“Looking to 2025, we maintain the forecast for sequential cuts from February because we still expect inflation to lose material and the UK rate to remain restrictive. That said, we now predict the Bank Rate to fall to 3% in November 2025 (vs. 2.75%) previously) and sees more uncertainty around the baseline forecast,” a Goldman Sachs note said.