Labour government's tax-raising budget to harm UK businesses' hiring and increase inflation, warns UK businesses.

• On Wednesday, British businesses faced a financial blow with the implementation of new taxes by Finance Minister Rachel Reeves, which affected employers.
• The largest revenue-raising measure announced was an increase to the National Insurance payroll tax paid by employers, which businesses claim will hinder hiring and pay raises.
• The forecast for U.K. core inflation was increased by Goldman Sachs, with changes to employer NI contributions being identified as a significant factor.

The UK economy may face negative consequences due to Finance Minister Rachel Reeves' tax-increasing budget, as analysts predict it could lead to decreased hiring and increased inflation.

The largest revenue-raising measure announced Wednesday was an increase to the National Insurance payroll tax paid by employers, which Reeves forecasted would raise £25 billion ($32.3 billion) annually over the course of the parliament.

From April 2025, employer NI will increase by 1.2 percentage points to 15%, and the threshold for employers to start paying NI for workers will decrease from £9,100 to £5,000.

Reeves was able to fulfill the Labour government's promise not to increase taxes on working people while also partially addressing the £22 billion public funding deficit, thanks to the highly anticipated employer levy.

The move has been criticized by business and industry analysts, as well as the opposition Conservative party, as disingenuous, as it would limit companies' ability to boost wages and hiring, ultimately harming employees and undermining the government's pro-growth agenda.

The Institute of Directors' director of policy, Roger Barker, characterized the tax burden as "more than anticipated" and a "significant setback" for businesses.

Barker stated on Wednesday that Reeves' announcement created a false dichotomy. He explained that the effects of higher National Insurance costs would impact profits in the short term, but would eventually be passed on through lower wages and employment.

'A tough budget for business'

The U.K.'s minimum hourly wage will increase, resulting in higher costs for businesses to employ their lowest paid workers, as confirmed by Reeves on Wednesday.

The minimum hourly pay for over 21-year-olds will increase by 6.7% to £12.21, while the equivalent for 18 to 20-year-olds will rise 16% to £10. Additionally, the headline corporation tax threshold will remain capped at 25%.

Reeves stated that small businesses would experience minimal impact from the changes, as the employment allowance would be increased from £5,000 to £10,500. This would enable firms to hire up to four minimum wage workers full-time without paying employer NI.

According to industry experts, the proposed measures will not significantly aid the majority of the country's 5.5 million small and medium-sized enterprises.

Business owners are already under immense pressure due to cash flow issues and rising operational costs, and this will only add to their burdens, says Andrew Martin, CEO and founder of SMEB, a payments platform for SMEs.

The Confederation of British Industry's chief executive, Rain Newton-Smith, characterized the budget as challenging for businesses.

Newton-Smith stated that although the Corporation Tax Roadmap will bring stability, the rise in National Insurance Contributions and other increases to the employer cost base will increase the burden on businesses, making it more expensive to invest, hire people, or give pay rises.

Economic impact

The Office for Budget Responsibility, a government-funded but politically neutral body, stated that Reeves' proposed tax increases and public spending measures are expected to stimulate economic growth in the short term. However, this may also lead to inflation because businesses may pass on the extra costs to consumers through higher product prices.

In an interview with CNBC on Thursday, Andrew Sheets, the global head of corporate credit research at Morgan Stanley, expressed a similar perspective.

The expert stated that the forecast for growth in the U.K. over the near-term is likely to increase due to this development, but it may also exert a slight upward influence on inflation.

Goldman Sachs has revised its forecast for UK core inflation by 0.2 percentage points through 2025, with its estimate for the reading reaching 2.5% by December 2025. The change in NI contributions has been cited as the reason for the increase. Headline inflation is expected to rise by a slightly lower 0.1% to reach 2.3% at the end of next year, due to the mitigating impact of a fuel duty freeze.

The bank revised its 2025 GDP forecast from 1.5% to 1.6%.

The Bank of England may slow its pace of monetary easing due to Wednesday's announcement, keeping business borrowing costs high. Markets predict an 80% chance that the central bank will cut rates by 25 basis points when it meets next week.

According to Sheets of Morgan Stanley, the Bank of England may cut rates at a slower pace than initially anticipated.

Goldman anticipates the BOE to proceed with the next cut in a week, but Reeves' plans may lessen the need for immediate cuts, delaying Goldman's expectation of a December cut.

According to Goldman Sachs, we anticipate sequential cuts from February in 2025, as we expect inflation to decrease significantly and UK rates to remain restrictive. However, we now predict that the Bank Rate will fall to 3% in November 2025 (from 2.75% previously), and we see more uncertainty surrounding our baseline forecast.