British workers and the businesses that employ them have been clobbered by the steepest increase in employment taxes of any advanced economy, according to fresh analysis from the Organisation for Economic Co-operation and Development (OECD).
The Paris-based body’s annual audit of payroll taxes lays the blame squarely at the door of Chancellor Rachel Reeves, whose October 2024 Budget raised employers’ national insurance contributions and extended the freeze on personal income tax thresholds — a combination that has quietly tightened the screws on payrolls across the country.
For an average-earning worker in the UK, the so-called “tax wedge”, the gap between what it costs an employer to put someone on the books and what the employee actually takes home, climbed to 32.4 per cent last year, up from just under 30 per cent the year before. That 2.45 percentage point jump dwarfs the OECD-wide average rise of a mere 0.15 points and outpaces every other country in the 38-nation study. Only Estonia (1.95), Germany (1.34) and Israel (1.09) posted increases above a single percentage point.
While Britain’s absolute tax wedge still sits below the OECD average of 35.1 per cent, the velocity of the change is what has alarmed economists. The OECD warned that a widening wedge “tends to reduce incentives to work and hire by reducing take-home pay and increasing employers’ labour costs”, a particularly bruising message for the small and medium-sized enterprises that dominate Britain’s private-sector payroll.
The damage stems from two deliberate choices in the Chancellor’s maiden Budget. First, Reeves slashed the earnings threshold at which employers start paying national insurance to £5,000 from £9,100, a move that hit hardest those firms employing part-time workers and lower-paid staff, think cafés, care homes, corner shops and hospitality operators. Second, the headline rate of employers’ national insurance climbed from 13.8 per cent to 15 per cent.
The Treasury’s £25 billion-a-year revenue raiser has been accompanied by a stealthier levy: personal income tax thresholds remain frozen at 2021-22 levels until 2031, pulling more workers into basic and higher-rate bands as nominal wages creep up, the phenomenon known as fiscal drag.
The labour market is already showing the strain. Since the Chancellor first unveiled the employer NI rise in October 2024, payrolled employment has fallen by 143,000, according to official figures. The economic inactivity rate, the proportion of working-age adults neither in work nor looking for it, nudged up to 21 per cent in the three months to February, from 20.7 per cent in the previous quarter.
That deterioration pre-dates the eight-week-old US and Israeli airstrikes on Iran, which the OECD warned this month would inflict the largest growth hit in the G20 on Britain and the sharpest inflation jolt in the G7. Economists expect unemployment to climb further as households and firms rein in spending to cope with the conflict-driven surge in energy costs.
The OECD has repeatedly urged successive governments to tackle the “large compliance costs” baked into Britain’s tax code, arguing that complexity itself is a drag on hiring and growth. For the nation’s SMEs, already contending with higher borrowing costs, sluggish consumer demand and an unsettled global backdrop, the twin pressures of a rising tax wedge and an increasingly byzantine rulebook make the case for reform harder to ignore.
Whether the Chancellor heeds that advice in her next fiscal set-piece will be watched closely by business owners who have spent the past eighteen months absorbing a rise in employment costs unmatched anywhere in the developed world.
