29.10.2024

Workers face potential pay freezes and even cuts

The latest insight from The Global Payroll Association (GPA), reveals that employees in the UK could be facing a real term pay cut if the government announces a National Insurance increase during the Autumn Budget.

The Labour government’s first Autumn Budget statement is on 31st October, and it is no secret that a swathe of tax changes are set to be announced. As the nation anxiously waits to hear exactly what these changes will entail, the headline grabbers that have so far been suggested include changes to both Capital Gains Tax (CGT) and Inheritance Tax (IHT).

However, these are both ‘major life moment’ taxes that only impact a person a few times during their life, and because they’re dominating the news cycle, less attention is being paid to the potential Budget announcements that are set to impact workers on a day-to-day basis.

The GPA believes that the most significant of these additional tax changes is likely to be an increase in National Insurance contributions.

Pay freezes expected due to National Insurance Hike

It is widely expected that the government is going to increase the contribution that employers are obliged to make towards National Insurance (NI)

Labour has repeatedly pledged that it will not increase NI contributions for ‘working people’, which makes it all the more likely that they’ll insist on taking more from businesses instead, with forecasters suggesting that a +1% increase in employer contributions will raise an estimated £8.5bn a year for the public purse.

While this will not directly break the pledge Labour made to working people, it is likely that employers will choose to recoup their increased tax losses by freezing and potentially even reducing employee salaries, whilst also slashing additional job benefits.

So, if an employer NI contribution increase is announced on the 31st October, employees need to prepare for the possibility of pay cuts or, at the very least, an increased reluctance among employers to offer pay rises.

Melanie Pizzey, CEO and Founder of the Global Payroll Association, says: “The upcoming budget is going to be, as Labour themselves have confessed, painful for many to hear. It seems that big changes are on the horizon, and we’re not just talking about the big life moment taxes that have hit the headlines, such as Capital Gains and Inheritance Tax.

"The country faces a radical overhaul of tax contributions across the board and even if the proposed tax changes don’t directly affect you, you’re likely to feel the impact somewhere along the way.

"The prime example of this is, of course, an increase in National Insurance obligations for employers. As their outgoings increase, businesses are going to look for savings elsewhere and the unfortunate reality is that employees are ones who are likely to feel the pinch.

"Whilst pay cuts aren’t out of the question, a freeze on pay increases is the least they can expect in the short to medium term and, with inflation continuing to rise, this will inevitably result in a real term pay cut down the line.”

Retirement and Pensions

Pensions are also set to take a hit during the Autumn Budget.

The government has refused to rule out changes to the 25% tax-free lump sum and is apparently considering cutting the tax-free amount from £268,275 down to £100,000. However, some experts say that doing this would open the government to legitimate legal challenges.

Another potential change to pensions is to start including them in Inheritance Tax (IHT) calculations. As it stands, pensions are not included in IHT but if Labour changes this, it could mean that families and loved ones will have to pay thousands of pounds in additional IHT.

As for the state pension, Labour has committed to maintaining the triple lock which ensures that the state pension will continue to increase by the highest of inflation, wages or 2.5%. However, the government has failed to pledge that the state pension will forever be protected from tax, so there is a small chance that the Autumn Budget brings a nasty surprise on this front.

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