Workers are expected to feel the impact of a £25 billion increase in employers’ national insurance contributions, which could adversely affect living standards, according to the UK’s budget oversight authority.

Rachel Reeves revealed a tax increment costing around £800 per employee. The Office for Budget Responsibility (OBR) has indicated that this adjustment would result in reduced wages and increased prices.

Business leaders characterized the tax hike as a “huge burden,” suggesting it may deter companies from hiring and increasing salaries. However, the chancellor plans to offset impacts on public sector employers with an annual funding boost of £5 billion.

Reeves described her substantial tax increase decision as a “difficult choice” and emphasized that it was essential for enhancing public services. “We are asking businesses to contribute more, and I recognize that the effects of this decision will extend beyond businesses,” she commented. “Given the circumstances I’ve inherited, this is the right decision. Thriving businesses rely on effective education, healthy public services depend on a functional NHS, and economic strength relies on solid public finances.”

Under the new rules, employers will be responsible for 15% of an employee’s salary in national insurance contributions, up from the previous rate of 13.8%. Additionally, the threshold for these contributions has been lowered from £9,100 to £5,000 a year.

In a move to aid small businesses, Reeves has increased the employment allowance that companies can claim back against national insurance expenses to £10,500.

Reeves has faced criticism for allegedly violating the Labour party’s manifesto commitment against raising national insurance and taxing “working people.” She defended her actions, claiming it reflects a “promise fulfilled,” asserting, “Working individuals will not face higher taxes in their pay due to today’s choices.”

Nevertheless, the OBR has projected that 60% of the financial burden from the new levy will be transferred to workers and consumers, manifesting as decreased wages and increased costs. By 2027, it predicts that 76% of the costs will be passed through reduced wages, according to the watchdog.

Nearly one million businesses are expected to be adversely affected by this change, with an average tax increase estimated at £26,000 per employer and over £800 per employee.

This tax increase is likely to strain living standards, halting growth in household disposable income from 2026 to 2028 as wage expenses accrue. Overall, throughout the parliamentary term, household disposable income is projected to increase by only 0.5% annually in real terms, a slight improvement compared to the decline seen from 2019-2024, yet only half of the pre-pandemic average.

The tax reform is predicted to have a “significant negative impact on work incentives,” equating to a loss of 50,000 jobs, according to the OBR. The combined effects of reduced wages and employment would cut tax revenues by £9.6 billion annually by 2029, leading to a total revenue of £16 billion for the Treasury.

Paul Johnson, an expert from the Institute for Fiscal Studies, remarked, “Even if these changes do not appear on payslips, ultimately, someone will bear the cost of these increased taxes, predominantly working individuals.”

Mike Brewer, the interim head of the Resolution Foundation, noted that Reeves has effectively reversed the previous government’s national insurance cuts, resulting in a complex situation with varied impacts on different groups. He identified self-employed individuals and small businesses as potential beneficiaries, while firms employing low and very high earners face greater disadvantages.

Tina McKenzie from the Federation of Small Businesses expressed appreciation for measures to protect smaller companies but cautioned that they would still struggle with the increase in employer national insurance alongside other government-imposed costs, stating that it could adversely affect jobs, wages, and pricing.

Lord Bilimoria, an entrepreneur and crossbench peer, described the national insurance increase as a significant burden on businesses, predicting that it would significantly hinder growth potential.

Andrew Goodacre, CEO of the British Independent Retailers Association, denounced the budget as detrimental to high street businesses, while Kate Nicholls, chief executive of UKHospitality, referred to it as yet another setback for hospitality firms, highlighting how rising taxes, costs, and wavering consumer confidence threaten to stifle growth.

However, Paul Nowak from the TUC argued that there was no direct correlation between employer national insurance rates and wages. He emphasized that in a climate where executive salaries soar to 100 times average pay and dividends exceed wage growth, workers shouldn’t bear the cost of moderate increases in employer national insurance contributions.

Jeremy Hunt, the shadow chancellor, criticized Reeves’s proposals as a “budget of broken promises,” claiming they would undermine the already delicate trust in British political promises. He emphasized that Labour had assured the public they would not raise taxes on working people, yet they have done so.