According to an analysis by the Centre for Policy Studies, the share of an employee’s salary owed in tax is set to increase to 21.3% this year, up from 17.5% in 2022. This cost rises as businesses prepare for a hike in the national living wage, which will increase from £11.44 to £12.21 per hour in April.
In addition, the government’s gradual alignment of wage rates for younger workers with those over 21 is expected to raise employment costs further.
“The more of an employee’s salary is owed in tax – whether paid by the employee or directly by the employer – the more costly it is for businesses to create and sustain jobs,” said Daniel Herring, tax and fiscal researcher at the Centre for Policy Studies.
Kevin Poulter, an employment partner at Freeths, warns that smaller businesses and start-ups may struggle with these rising costs. He highlights that while many companies voluntarily improve wages beyond the statutory minimum, including through bonuses and other incentives, increasing labour costs could force some to impose redundancies, halt recruitment, or freeze salaries.
Industries that rely heavily on lower-paid workers, such as manufacturing and hospitality, will likely feel the most pressure. These sectors face heightened competition from countries offering cheaper labour, making it harder to sustain UK-based jobs.
The Chartered Institute of Personnel and Development (CIPD) has called on the government to provide additional support to mitigate potential job losses. It stresses the need for tailored guidance for smaller businesses disproportionately affected by rising employment costs.