Ryan FowlerBusinesses employing low-wage workers are bracing for a sharp rise in costs in 2025, driven by an increase in employer’s National Insurance contributions.
According to new analysis by the Centre for Policy Studies (CPS), the tax wedge – the total proportion of an employee’s wage taken by taxes – for minimum wage earners will surge to 21.3% of their salary in 2025. This marks a substantial increase from 17.5% in 2024.
In real terms, employers will now pay £2,583 in National Insurance contributions for each full-time minimum wage worker, compared to £1,617 in 2024. Combined with a rise in the minimum wage itself, it will cost businesses an additional £2,367 per employee annually, making 2025 the most expensive year on record for businesses employing low-wage workers.
Historically, the tax wedge has fluctuated since the introduction of the minimum wage in 1999. In 2010, it peaked at 18% before being lowered to 11% by 2015, thanks largely to increases in the personal income tax allowance. However, stagnant thresholds and rising wages since then have steadily pushed the figure back up. The 2025 spike, however, is driven by a Budget decision to raise employer’s National Insurance while significantly reducing the threshold at which contributions start.
Daniel Herring, tax and fiscal researcher at CPS, commented: “The more of an employee’s salary is owed in tax – whether paid by the employee or directly by the employer – the more costly it is for businesses to create and sustain jobs. Increasing taxes on employment harms businesses and workers alike. By making it more expensive to employ people, the hikes in employer’s National Insurance disproportionately affect the lowest paid or those who are looking to move back into work after being economically inactive.”
For higher wage earners, increased hiring costs are likely to translate into slower wage growth over time. However, for minimum wage positions, where wages are already fixed, businesses are expected to respond by reducing hiring, limiting job opportunities for those at the lower end of the income scale and individuals seeking to re-enter the workforce.
Robert Colvile, director of CPS, also weighed in, stating: “Labour claims to understand the importance of growth and to have made it a priority. But it was clear from the moment of the Budget that taxing jobs and work would damage the economy. And as this analysis shows, the changes to employer’s National Insurance and the increases in the minimum wage make it disproportionately more expensive to employ those at the lower end of the wage scale.”
The CPS argues that the Government should reconsider its approach, warning that the tax burden could undermine job creation, especially in sectors reliant on low-wage labour. Without intervention, businesses will face increased pressure, potentially slowing economic recovery and growth.
