Low-paid jobs at risk from Labour’s tax increases on businesses

The Struggle of Small Businesses Under New Budget Measures

The latest government budget measures have sent shockwaves through the small business community, with many entrepreneurs like Cliff Nicholls feeling the squeeze. Cliff, who runs two trampoline parks and indoor play centers in Tamworth and Bolton, has been forced to abandon expansion plans and cut operational costs drastically. The dual impact of rising national minimum wage, reduced thresholds for national insurance contributions (NICs), and increased employer NIC rates has created a perfect storm of financial pressure. "We’ve had to take some fairly radical decisions, reducing our opening hours and making a senior staff member redundant," Cliff explained. For small businesses, these changes are not just a minor adjustment but a significant blow to their already tight profit margins.

The Policy Changes and Their Impact on Employers

The government’s decision to lower the NIC threshold from £9,100 to £5,000 per year and increase the employer NIC rate from 13.8% to 15% has left employers reeling. For an employee earning £23,800 a year, based on a 37.5-hour workweek at the new National Living Wage (NLW), the employer will now have to pay nearly £800 more in NICs annually. This change disproportionately affects businesses that rely on lower-paid workers. For instance, employers of those earning £9,000 a year will see their NIC contributions rise by around 7%, while those paying higher salaries, such as £75,000, will face a relatively smaller increase of 2%. These changes, while aimed at supporting low-paid workers through the NLW increase, are offset by the added financial burden on employers.

Extended Employment Rights and Rising Business Costs

In addition to the NIC changes, the government has introduced a series of employment rights reforms. These include extending statutory sick pay to lower-paid employees, making it available from the first day of illness, and allowing employees to claim unpaid parental leave from day one. While these reforms aim to improve working conditions, they add significant costs for businesses. The government estimates that these changes will cost businesses around £5 billion. For employers like Cliff, who are already grappling with rising NICs and wages, these additional costs are unsustainable. "The business rates changes probably have a bigger impact on us than national insurance," Cliff said, highlighting the cumulative effect of these policies.

The Disproportionate Burden on Low-Paid Workers and Small Businesses

The combination of higher NICs, rising wages, and extended employment rights has created a challenging environment for businesses that employ low-paid workers. Nye Cominetti, principal economist at the Resolution Foundation, pointed out that these changes disproportionately affect low-paid workers. "Extending statutory sick pay to those previously ineligible adds costs for employers already facing higher NICs and rising wages," he said. Cliff echoed this sentiment, noting that his business will have to pay between £55,000 and £60,000 more in business rates alone next year. For many small businesses, these increased costs are likely to lead to tough decisions, such as reducing staff, cutting hours, or even closing operations.

The Ripple Effect on the Economy

The impact of these budget measures is already being felt across the economy. Confidence among small businesses has fallen to its lowest level in a decade, excluding the pandemic, according to research by the Federation of Small Businesses. Many businesses are being forced to raise prices to offset the increased costs, contributing to higher inflation. The Office for National Statistics reported that inflation rose to 3% in January 2025, the highest level in 10 months. Additionally, the workforce is shrinking, with significant declines in sectors that employ large numbers of lower-paid workers, such as manufacturing, retail, and hospitality. Voluntary business closures have also increased by 9% since December 2024, highlighting the challenges businesses are facing.

The Government’s Response and the Path Forward

Despite the challenges, the government maintains that the budget measures are designed to support businesses and protect working people. An HM Treasury spokesperson said, "We delivered a once-in-a-parliament budget to wipe the slate clean and deliver the stability businesses need to invest and grow, while protecting working people’s payslips from higher taxes." The government has also announced measures to support businesses, such as capping corporation tax and permanently cutting business rates for retail, hospitality, and leisure businesses. However, for many small business owners like Cliff, these measures may come too late. As the economy continues to navigate this uncertain landscape, the focus will be on whether these policies can truly deliver the stability and growth they promise.