British workers and the businesses that employ them have been hit with the highest employment taxes of any advanced economy, according to new analysis from the Organization for Economic Co-operation and Development (OECD).
The Paris-based tax body’s annual audit lays the blame at the door of Chancellor Rachel Reeves, whose October 2024 Budget raised employers’ national insurance contributions and extended the personal income tax threshold – a combination that has quietly tightened pay screens across the country.
For the average wage earner in the UK, the so-called “tax wedge”, the gap between what it costs an employer to put someone on the books and what an employee actually takes home, rose to 32.4 percent last year, up from just under 30 percent the previous year. That 2.45 percent jump puts the OECD as a whole up 0.15 percentage points and surpasses all other countries in the 38-nation survey. Only Estonia (1.95), Germany (1.34) and Israel (1.09) posted increases of more than one percent.
Although Britain’s total tax rate still sits below the OECD average of 35.1 per cent, the pace of change has alarmed economists. The OECD warned that economic expansion “tends to reduce incentives to work and hire by reducing take-home pay and increasing costs for employers,” a damaging message for Britain’s small and medium-sized businesses that manage private income.
The damage stems from two deliberate choices in the Chancellor’s first Budget. First, Reeves lowered the salary threshold at which employers start paying national insurance to £5,000 from £9,100, a move that hit hard at those companies that employ part-time and low-wage workers, think tanks, care homes, corner shops and hospitality workers. Second, the premium rate for employers’ national insurance rose from 13.8 percent to 15 percent.
The Treasury’s £25 billion annual tax hike has been accompanied by tighter taxation: the personal income tax threshold remains frozen at 2021-22 levels until 2031, pulling more workers into the primary and upper brackets as wages rise, something known as fiscal drag.
The labor market is already showing difficulties. Since the Chancellor first announced employer NI increases in October 2024, paid workers have fallen by 143,000, according to official figures. The unemployment rate, the proportion of working-age adults who are not working or looking, rose to 21 percent in the three months to February, from 20.7 percent in the previous quarter.
That deterioration begins ahead of the eight-week-old US and Israeli airstrikes on Iran, which the OECD warned this month would cause a sharper G20 growth in Britain and sharper inflation in the G7. Economists expect unemployment to rise as households and firms continue to spend to cope with rising energy costs caused by the conflict.
The OECD has repeatedly called on successive governments to tackle the “huge compliance costs” built into Britain’s tax code, arguing that the complex itself is a drag on employment and growth. For the nation’s SMEs, which are already facing high borrowing costs, lack of consumer demand and an unsatisfactory global background, the twin pressures of rising tax rates and an increasingly Byzantine legal book make the issue of reform difficult to ignore.
Whether the Chancellor heeds that advice in his next budget will be closely watched by business owners who have spent the last eighteen months experiencing increases in employment costs unmatched anywhere in the developed world.
