‘It’s very tough. We’re really being forced to question whether this is viable,” says Dan Brod, who has spent the past 16 years building his small chain of luxury pubs and restaurants in England’s idyllic south-west.
From next weekend, the owner of the Beckford Group, alongside almost one million other businesses, will be hit with a combined £25bn rise in employer national insurance contributions (NICs) as Rachel Reeves’s autumn budget measures come into effect. With a worsening economic backdrop, the fear is the change will only make matters worse.
“My personal politics are slightly left of centre, but it seems odd the government is asking us to raise prices and employ less people. There is no other answer than that,” Brod says.
Last week at the spring statement, the Office for Budget Responsibility (OBR) said Reeves’s tax changes were contributing to falling recruitment and rising redundancies. Coupled with a 6.7% increase in the national living wage from Tuesday, to £12.21 per hour for those aged 21 and over, the Bank of England has also warned employers are freezing hiring plans.
The chancellor argues the money is badly needed to plug a shortfall in the government finances left by the Conservatives – with the position made significantly worse by soaring borrowing costs and a weak economic outlook – while providing sufficient cash to fix Britain’s battered public services. Her critics, however, say taxing employment could be a counterproductive solution.
“It was a cardinal error. I understand the thinking, but it is a case of the politics overtaking the economics,” says Charlie Bean, an ex-OBR board member and former Bank of England deputy governor.
“There has been enough pushback from business and it’s becoming clear what the adverse effects are. But any chance of U-turn? From an economic point of view that would be sensible, and raise the money elsewhere.”
Bean would have preferred a rise in income tax, employee NICs, or VAT. Reeves had, though, ruled that out to help Labour cruise to a crushing general election victory last July.
From 6 April, the rate of employer NICs will rise from 13.8% to 15%, under plans announced by Reeves last October. The threshold for the tax being levied will also be slashed from £9,100 to £5,000 a year, in a part of the plan which business leaders warn will hit temporary and low-paid jobs particularly hard.
While 250,000 employers will benefit from an offsetting tax relief, as many as 940,000 – including major high street retailers, small firms, care providers, charities, and councils – will lose out, according to HMRC.
Alongside sounding the alarm on redundancies, business leaders warn their profits will be hit, pay increases for staff will be less generous, and they will be forced to pass on the higher costs of employment to customers – threatening to add to already bubbling inflationary pressures.
Hospitality, leisure and retail will be hit particularly hard, largely as these sectors employ more low-paid workers and temporary staff, where slashing the NICs threshold will have the biggest impact. “It is the most regressive tax change I have seen in 30 years in hospitality,” says Kate Nicholls, the chief executive of UKHospitality. “The government points to tough choices, but it belies that tough choices are being made by businesses about this.”
Mike Gavin, director of Arc Hospitality Recruitment, a Merseyside-based agency specialising in hospitality, hires 9,000 workers each year. These include waiters, bar staff, chefs and kitchen porters for Premier League football clubs including Liverpool, Everton, Manchester United and Arsenal.
“We’re likely to see an effective doubling in our employer NI bill,” he says. His company has moved offices to save money, and is negotiating with clients on splitting the cost. “It goes right down the wire until we get to April. There is going to be a financial impact and it won’t be an insignificant one.”
Reeves has faced down business complaints by challenging her opponents for alternative ideas. The Conservatives and Liberal Democrats have sought to label the changes as a “jobs tax”. But the chancellor told the Commons last week: “They cannot object to the tax increases and support the money we have invested in our public services. To say otherwise, I am afraid, is fairytales and the magic money tree – it just does not add up.”
Part of Labour’s plan is likely to rest on the idea that Britain’s economy, for too long, has been fuelled by low-paid and insecure work. Ministers are pushing ahead with the biggest shake-up of workers’ rights in decades, to the dismay of many business groups who say it only adds to their costs and will further hit hiring.
But some experts say the changes will incentivise employers to invest in technology, rather than resorting to low-paid, unskilled work. The fashion retailer Next says it does not plan to cut jobs, but will use more mechanisation in warehouses and shops to offset rising costs. Greggs says a rising living wage will put more money in customers’ pockets to spend on its sausage rolls and pasties. Meanwhile, Andy Haldane, the former Bank of England chief economist, reckons Reeves’s budget was “pro-growth” because funding public services provides employers with a healthier, better-educated, and more mobile workforce. “You can’t have it both ways. If you want to build the right business environment you require investment in those things, and that requires us to pay for those things,” he told the Guardian last year.
Official jobs market data also shows employment is holding up far better than the business community suggests – confounding recent business surveys suggesting the fastest pace of job shedding since the 2008 financial crisis, excluding the pandemic.
Even with reliability issues with the headline employment figures, other data – including for vacancies and HMRC payroll information – suggests the industry has over-egged the scale of the problem.
It helps that the policy comes in a tight jobs market, with wage growth running at among the highest rates in decades, as many employers struggle to find staff amid the loss of readily available EU labour after Brexit, and the surge in working-age adults leaving the jobs market due to ill health.
A sudden stop, though, was never really on the cards. Firms have known about the 6 April NICs increase for the past five months, and are spreading out their response over time; a slow-puncture effect is more likely.
Still, vacancy rates are falling faster in hospitality than for other industries, while business leaders say the tax changes will undermine Labour’s main goal: to grow the economy.
“It has knocked business confidence and make it harder for firms to hire, invest and grow,” says Louise Hellem, chief economist at the CBI. “Firms are squarely behind this government’s growth mission and want them to succeed. But it’s the capacity for businesses to invest that will decide whether we grow or not. They need a boost in confidence.”
Growth has come close to stagnation in recent months; with zero progress in the third quarter of last year and a nugatory 0.1% in the final three months of 2024. Things have not improved much: the economy shrank by 0.1% in January.
Nick Mackenzie, chief executive of Greene King, says the tax changes will make turning this around harder. “The government should be in no doubt that hiking the cost of doing business is causing pubs to reassess decisions around investment, prices and hiring.”
As the operator of one of the country’s biggest pub chains, employing 40,000 staff, Mackenzie would normally spend about £200m each year on its estate of 2,600 pubs, restaurants and hotels. However – as for many operators – less could be spent on refurbishment projects, new bars, and garden refurbs in future.
Some pub operators are closing earlier during the week to save costs. Shepherd Neame, the UK’s oldest brewer, is putting up its prices, while the British Beer and Pub Association blames tax rises for the nationwide average price of a pint hitting £5. “We want to be able to invest more and keep prices low, but the government needs to reduce these spiralling costs to allow us to do so,” Mackenzie says.
Choking off recruitment in hospitality could also hit another of the government’s most important priorities: getting more people into work. Ministers want to hit an employment rate of 80%, up from 75% at present, with a focus on helping young adults and those with health conditions in particular.
Youth unemployment has risen sharply, with the number of 16- to 24-year-olds not in employment, education or training (Neet) at almost one million, the highest level for more than a decade. Reeves’s spring statement benefit cuts were also justified by the argument that they would help more people to find work.
Nicholls says the tax changes will dent progress. “Unfortunately, the cost of creating new roles has substantially increased. Employers are much less likely to take a risk on somebody who might not be able to work full-time – those are the opportunities that will get cut first.”
Bean agrees. “Someone on disability benefit is unlikely to transfer straight into a middle-management job in a big company or something. They’re likely to go for more entry-level, flexible jobs. It is particularly shortsighted.”
With more than 240 staff at his restaurants in Bath, and boutique pubs in rural Somerset and Wiltshire, Brod says he is putting his hiring plans on ice. Already barely turning a profit, with wage costs taking up 40% of turnover, he says price rises are tough when consumers have been stretched by the cost of living crisis – meaning his employment and investment plans will take the hit.
“Not everyone can become an AI programmer. Not all our young staff, looking for a first job, can go and work in tech or engineering. A, those jobs don’t exist yet, and B, we’re not suddenly going to build loads of factories.
“The clue should be in the name: ‘Labour’. It seems to be anti-labour, anti-jobs That is a really weird thing for me. I can see why they did it, but I don’t think it was the right thing to go for.”
