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Workers Face Potential Pay Freezes And Even Cuts
Image by Picdream from Pixabay
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 upcoming Autumn Budget on the 31st October.
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.”
But what other changes are on the cards and how will they impact the average person when it comes to their financial stability?
Personal Savings
Labour has the option of increasing tax income by reducing the ISA allowance, which currently allows you to put up to £20,000 a year into an ISA without paying tax on the interest gained.
If the government follows this path, your savings ceiling will be reduced because you’ll either have to invest less money, or pay more tax on the interest you gain.
Homeownership
On 31st March 2025, stamp duty land tax (SDLT), which is the tax you pay when buying a home, is set to increase. This means that, even if Labour makes no further changes between now and then, from April homebuyers could have to pay an additional 2% in SDLT charged on properties valued as low as £125,001.
Next year’s changes will also impact first-time buyers because the existing SDLT relief threshold that means they pay no SDLT on purchases below £450,000 will be reduced to £300,000.
And it doesn’t end there because once you’ve purchased and moved into your home, you still have to pay council tax and the Prime Minister has refused to rule out the potential for increase here as well. To avoid creating absolute fury, it’s likely that if Labour does increase council tax, it will be limited to only the most valuable homes.
Day-to-Day Expenses
The government has not ruled out increasing Alcohol Duty and forecasts suggest that by increasing the duty paid on beer, wine, and spirits could raise an additional £800m for the public purse in 2025.
An increased duty would make alcohol more expensive to buy, which will increase daily expenses, and, according to the drinks industry, have a “catastrophic” impact on pubs.
Fuel Duty is also set to increase which means motorists will pay more for their petrol and diesel. Fuel duty has been frozen since 2011-12, and the Conservative government cut the rate by a further 5p in 2022 as prices soared with the onset of the war in Ukraine.
It is expected that this 5p cut is likely to be scrapped, thus increasing the cost of filling a tank by an estimated average of £3.30. And there’s nothing to say that Labour won’t announce further duty increases during the budget.
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.