Millions of workers will see their pay rises hit by £600 from the increase in National Insurance on businesses, says the official Budget forecaster.
The Office for Budget Responsibility stressed that three quarters of the rise in National Insurance on employers would ultimately feed through into lower wage increases for employees.
“The initial incidence of the rise in National Insurance contributions falls on the employer,” OBR chairman Richard Hughes told BBC radio.
“It cost them about £800 per employee but we expect that over a number of years the cost of that tax is past on to the employee, in the medium term about three quarters of that cost is ultimately born by the employee in the form of lower real wages.
“We expect employees to see less real wage growth over the next five years than they would otherwise have experienced had this tax not been levied.
“That leaves about a quarter of the cost of the tax, about £200 per employee, falling on employers in the form of lower profit.”
Rachel Reeves admitted the day after the Budget that workers would be impacted by the NI rise on firms.
The Chancellor, though, insisted that overall household incomes will go up over the next five years.
Ms Reeves took to the airwaves in the morning after delivering the first Labour Budget in 14 years to defend its measures, some of which are controversial.
Higher rates on employers’ NI contributions and a lower starting threshold are forecast to raise £25.7 billion by 2029-30.
The rate will increase by 1.2 percentage points to 15% from April 2025, with payments starting when an employee earns £5,000, down from the current £9,100.
Ms Reeves, who has previously described such an NI rise on firms as a “jobs tax which takes money out of people’s pocket” admitted on BBC radio: “This will have an impact on wage growth.”
But she added: “What alternative was there?”
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She argued that she had to fill a £22 billion black hole in the public finances, a figure which the independent Office for Budget Responsibility has not endorsed, and she did not want to increase the main rates of VAT, income tax or National Insurance on workers, after the promise in Labour’s manifesto not to do so.
The OBR, though, forecasts that by 2026-27 some 76% of the total cost of the extra NI hit on businesses is passed on through lower real wages - a combination of pay cuts and increased prices.
The measure could also lead to the equivalent of around 50,000 average-hour jobs being lost, the official Budget watchdog said.
Ms Reeves acknowledged that businesses will have to absorb the costs of paying more NI and this would probably feed through into lower wage rises.
The Chancellor told BBC Breakfast: “I said that it will have consequences.
“It will mean that businesses will have to absorb some of this through profits and it is likely to mean that wage increases might be slightly less than they otherwise would have been.
“But, overall, the Office of Budget Responsibility forecast that household incomes will increase during this Parliament.
“That is a world away from the last Parliament, which was the worst Parliament ever for living standards.”
The overall tax burden will reach a record 38.3% of gross domestic product (GDP) in 2027-28, the highest since 1948 as the UK recovered from the impact of the Second World War.
Ms Reeves said: “This Budget was to wipe the slate clean after the mismanagement and the cover-up of the previous government.
She added: “I had to make big choices. I don’t want to repeat a Budget like this ever again, but it was necessary to get our public finances and our public services on a stable trajectory.”
The Chancellor was also unable to say whether her pledge at the Budget to raise income tax thresholds with inflation after 2028 was guaranteed.
“I’m not going to be able to write future budgets,” she said.
Budget measures include:
- Capital gains tax to go up by £2.5 billion, with the lower rate to rise from 10% to 18% and the higher rate from 20% to 24%.
- Changes to inheritance tax, including bringing pension pots within the tax from April 2027, and reducing reliefs for agricultural and business property, raising a total of £2 billion a year.
- Income tax thresholds will rise in line with inflation from 2028-29, reducing the impact of “fiscal drag” where rising wages see people pulled into higher tax bands.
- The freeze on fuel duty will continue, including maintaining the existing 5p cut.
- Draught duty will be cut by 1.7%, knocking a penny off a pint in the pub, but other alcohol rates will increase.
- Imposing VAT on private schools will raise £1.7 billion by 2029-30
Changes to the energy profits levy and air passenger duty rates will rake in £3.6 billion.
- The stamp duty land tax surcharge for second homes will increase by two percentage points to 5% from Thursday.
Shadow chancellor Jeremy Hunt said: “Many people thought this was a new Labour prospectus, not a traditional tax-and-spend prospectus, and they have woken up to a Chancellor who has given us the biggest tax-raising Budget in history.”
