Employees are facing potential reductions in their pay due to recent tax increases outlined in the Budget, which primarily target employers. A significant aspect of the Budget involves a £40 billion tax hike, primarily resulting from an elevated National Insurance rate for businesses and a lowered threshold for contributions. As a result, many companies might respond by restricting salary increases, a concern echoed by various think tanks, the government’s independent forecaster, and even Chancellor Rachel Reeves.

In an interview with the BBC, Chancellor Reeves noted that businesses would need to counterbalance these costs through their profits, likely leading to smaller wage increases than previously expected. James Smith, research director at the Resolution Foundation, emphasized that although employees may not see immediate changes in their paychecks, the impact will ultimately lead to lower wages over time. He clarified that this is indeed a tax burden on working individuals.

Additionally, other measures in the Budget, including substantial investments in public services, are anticipated to trigger short-term inflation that could hinder quicker reductions in interest rates. This inflationary pressure is expected to affect consumers' spending power as well.

The government has stated its commitment to prioritizing economic growth and has assured the public that they will experience increased disposable income by the end of the parliamentary term. However, Labour’s electoral promises not to raise taxes on “working people” have come under fire because of increased National Insurance Contributions for employers.

The Office for Budget Responsibility (OBR) has projected that by 2026-27, 76% of the National Insurance hike’s burden will likely be transferred to employees through restrained wage growth and higher prices. The OBR also predicts slow growth in average household income during this parliamentary term.

Despite these challenges, income growth is anticipated to outpace the 0.3% annual average seen from 2019 to 2024—a period marked by various economic shocks such as Brexit and rising energy costs. The pressures stemming from an aging population also pose challenges for public finances due to heightened demand for healthcare services.

The Institute for Fiscal Studies (IFS) pointed out that larger companies employing low-wage workers would be most affected by the rise in employer National Insurance Contributions. They cautioned that this could lead to fewer minimum wage job opportunities in the future and might generate significantly less revenue than projected if businesses respond with smaller pay raises.

Critics from opposition parties have condemned Chancellor Reeves’ approach as a detrimental strategy that could result in stunted economic growth and lower living standards. Shadow Chancellor Jeremy Hunt argued that this approach lacks a coherent plan for economic expansion. Meanwhile, Prime Minister Sir Keir Starmer defended his government’s actions as necessary steps towards stabilizing the economy.