Labour's Financial Puzzle: The Hidden Tax Burdens for Companies and Their Employees

Two weeks before the budget approval, it is gradually becoming clear what sacrifices are expected from the "broad-shouldered" martyrs to finance salary increases in the public sector. Sir Keir Starmer and Rachel Reeves have recently emphasized vehemently that they will not raise taxes for the "working population." Labour's party program also promises not to increase income tax, national insurance contributions, or VAT. However, despite these assurances, it is becoming evident that those who helped Labour to a historic parliamentary majority just three months ago might ultimately foot the bill. The tense impression left by Reeves as she entered Number 11 to inspect the "messed-up" work of her predecessors has since intensified. Reportedly, the notorious £22 billion "hole" in public finances, allegedly left by the Conservatives, has grown to £40 billion. Rumors are circulating in Westminster that employers might bear the brunt of tax increases in the future, particularly through an adjustment in the national insurance contributions they pay on salaries. Raising the current main rate of 13.8% by one percentage point could yield an additional £8.5 billion annually. Such a measure could indeed be seen as a breach of Labour's election program. However, changes in the scope of national insurance, rather than the rate, could narrowly avoid such a charge. One option under discussion is that employers would pay national insurance contributions on contributions to employee pensions. This could bring in up to £17 billion—a significant amount compared to the relatively low savings from ideologically motivated cuts to the winter fuel allowance and Labour's attacks on private schools. The challenge is that these tax increases on companies would ultimately be borne by their employees. Almost half of the companies that contribute more to occupational pensions than legally required would reduce these contributions in the event of a national insurance increase, according to a survey by the Association of British Insurers. Additionally, over 60% of respondents said that a tax increase would prevent them from increasing contributions in the future. A report by the Office for Budget Responsibility from 2021 even predicted that 80% of the increase in employers' national insurance contributions would be indirectly passed on to employees through lower wages. Neil Insull from the accountants Blick Rothenberg warns that this would contradict Labour's plans to strengthen workers' rights if companies refrain from hiring new staff or cut salaries and pension benefits due to increased costs.