Employers will scrap new year pay rises to cover the cost of higher National Insurance bills from April, leaving workers with a “double whammy” of rising costs and real terms pay cuts.
It will add further pressure on Prime Minister Boris Johnson to delay the new £12bn “health and social care levy” and ease the spiralling cost of living, a leading think tank co-founded by Margaret Thatcher has warned.
Business leaders also sounded the alarm on pay bumps for workers. The Confederation of British Industry, a trade body, warned the Government against “putting further pressure on businesses by making it more expensive to recruit.”
Mike Cherry, of the Federation of Small Businesses, said there would be less cash in everyone’s pockets to help secure Britain's economic recovery if the tax increase went ahead.
“The increased cost in employment will mean tough decisions. Some employers will be curtailing pay rises or having to reduce roles or hours. The OBR’s own analysis has shown this. This is unfair and the Government should change course," he added.
Tom Clougherty of the Centre for Policy Studies think tank said pressing ahead with the rise, which will see rates increase by 1.25 percentage points for both workers and firms, would “have the double effect of taking more money from hardworking taxpayers and disincentivising employers to raise pay”.
“This will only compound the pinch felt by millions as inflation climbs and energy prices soar. To offset rising costs and save millions from serious hardship, the Government must consider postponing or scrapping this tax rise,” he added.
Helen Dickinson of the British Retail Consortium, another trade association, said just like consumers, businesses faced a cocktail of higher bills, including for National Insurance and energy, as well as “rising wage bills, increased transport costs, and increased checks and documentation as a result of new import controls, all of which are forcing up prices”.
The calls came amid a split at the top of Government, with ministers debating whether the manifesto-breaking tax raid should go ahead, as families face the highest levels of inflation for 30 years and a 50pc increase in their energy bills.
Average annual wage growth currently stands at 3.8pc, according to the Office for National Statistics, trailing inflation, which hit 5.4pc last month. Workers must secure a pay rise of around 8.7pc this year in order to keep pace with rising living costs, analysis has found. The tax rise alone will add more than £500 to the annual bills of someone earning £50,000.
Boris Johnson this week refused to rule out delaying the increase, after the Institute for Fiscal Studies think tank said there was “fiscal room” to postpone it, while the Chancellor Rishi Sunak has distanced himself from the policy and called it “the Prime Minister’s tax” – seemingly putting the final say on any deferral in the hands of number 10.
Currently employees pay 12pc on earnings over £9,568 and 2pc on earnings over £50,270. Employers pay a higher rate of 13.8pc on workers' wages over £8,840. All rates will rise by 1.25 percentage points from April and those still working past state pension age will be forced to pay 1.25pc from April 2023 for the first time ever.
A Government spokesman said it understood families were under pressure, but insisted the tax increase was "progressive" and would help fund the NHS and pay rises for nurses.