The Reeves tax raid that threatens your next pay rise

Why the Chancellor’s plot to raise a ‘tax on jobs’ could hurt workers too

Wage growth has slumped to its lowest level since the pandemic, as businesses brace for tax rises in Rachel Reeves’s autumn Budget.
Total pay including bonuses rose by just 3.8pc in the three months to August, according to the Office for National Statistics (ONS), down from 4.1pc in July.
This marked the slowest rate of growth since November.
Meanwhile, annual pay growth excluding bonuses came in at 4.9pc, which was also the smallest rise since June 2022.
An early flash estimate shows that median monthly pay fell from £2,413 in August to £2,397 in September, marking the first monthly drop since July 2023.
However, there could still be worse to come for workers as economists fear the Government’s rumoured tax rises will hammer companies’ bottom line and reduce their ability to increase wages. 
Driving the latest slump in wage growth has been falling demand for workers, signalling the recent shift in power across Britain’s labour market. 
According to ONS data, the number of payrolled employees shrank by 15,000 in September, far more than the 3,000 drop expected by economists. 
This was the second successive monthly decline, following on from a fall of 35,000 in August.
This means that on a quarterly basis, growth in payrolled employment fell for the first time since January 2021, having risen consistently for the three years post-pandemic.
Vacancies also fell to 841,000 in the three months to September, down from 856,000 in August. 
This suggests that the days of hefty pay rises are fading fast as employers cut back on hiring, even before considering the impact of Reeves’s Budget. 
Rob Wood, the chief UK economist at Pantheon Macroeconomics, says: “Uncertainty about the Oct 30 Budget has led firms to pause hiring.”
Thomas Pugh, an economist at consulting firm RSM UK, adds: “In the September numbers we saw a very big drop in business confidence.  If you are a big business making a decision on hiring, you will be in a much better position after the Budget to know what is going on.”
When adjusted for inflation, pay growth cooled from 2.2pc to 1.9pc in September.
However, Charlie McCurdy, an economist at the Resolution Foundation, warns that the era of “healthy” pay growth is nearing its end. 
McCurdy says: “Today’s data should serve as a further warning that future pay growth will need to be driven by rising productivity, rather than a hot jobs market.”
This is alongside warnings that widely trailed tax rises in Reeves’s Budget on Oct 30 will make the situation worse.
Rob Morgan, the chief investment analyst at wealth manager Charles Stanley, says: “The Chancellor could be about to throw a wildcard into the mix.”
The main Budget policy likely to impact wages most will be the planned rise in employers’ National Insurance (NI) contributions.
In Labour’s manifesto, Sir Keir Starmer pledged that his party “will not increase National Insurance” as part of its promise for no tax rises “on working people”. 
However, the party has since changed tack by indicating that although employee NI contributions will be protected, they could increase the levy on employers. 
When asked about her plans on Monday, the Chancellor refused to rule out an increase in employer NI contributions and insisted this would not break Labour’s manifesto promise. 
However, speaking at the International Investment Summit, Sir Nicholas Lyons, chairman of Britain’s biggest long-term savings firm Phoenix, warned of potential “collateral damage” from an increase in employer NI.
He said: “All of these things might look good on paper, but you have to really look through and see, what are the implications of this? What are the potential impacts?”
Pugh says: “Effectively, National Insurance is a tax on jobs. You can make a distinction between employee and employer’s [contributions] but in reality, it is all a tax on jobs.”
A rise in employer National Insurance will not bring pay cuts, Pugh said, but it would put the brakes on future pay rises.
“National Insurance is all part of the cost of employing someone, and that does tend to be related to take-home pay,” he adds. 
“When you’re looking at the next round of pay reviews, companies will say our total compensation will go up by X and a portion of that is now taken up by our National Insurance contributions, which means the amount we can raise those salaries by is slightly lower.”
But tax rises are not the Government’s only policies poised to increase the cost of labour.
Employers are also grappling with Deputy Prime Minister Angela Rayner’s Employment Rights Bill, which includes new day-one rights for workers and extended statutory sick pay.
Alexandra Hall-Chen, the principal policy advisor for employment at the Institute of Directors, warns that these measures will increase costs for employers and thus water down the prospect of chunky pay rises.
She says: “Government should avoid measures in the forthcoming Budget which further increase the cost of employment.”