Job Cuts and Wage Pressure Loom as UK Businesses Navigate Tax Increase Challenges

Helena Hudson, the founder of the Real Eating Company, has reported that her chain of coffee shops faces unprecedented challenges in the current business climate, as tax bills rise significantly.

With a £127,000 increase in her tax bill coming in April, Hudson believes she cannot solely rely on increasing prices to offset costs, particularly as many of her staff will be affected by a 6.7 per cent rise in minimum wage.

As a result, she has decided to close a London café, make a long-standing manager redundant, and ask part-time staff to work longer hours or leave. "It's not what we want to do," Hudson stated.

Many businesses across the UK are confronting similar dilemmas as they adjust to the tax and wage increases announced in the October Budget by Chancellor Rachel Reeves.

The chancellor articulated that these measures were intended to restore stability in public finances and fund public services; however, they will considerably raise labour costs, especially in low-wage sectors like retail and hospitality.

The Bank of England is now faced with the question of whether a weaker job market will ultimately reduce wage growth, or if ongoing pay pressures will keep inflation above the 2 per cent target set by the government.

Evidence suggests that post-Budget announcements led to a reduction in headcounts, with official data indicating a decline in payroll employment in November and December as job vacancies continued to drop.

A recent survey noted that the proportion of businesses reducing staffing levels reached the highest point since the 2008-09 financial crisis, excluding the pandemic.

HSBC economist Liz Martins described the prevailing conditions as a "perfect storm" for the jobs market, given the combination of a diminishing economy, escalating costs, and increased potential for efficiencies via artificial intelligence.

Last week, retailer J Sainsbury announced plans to cut 3,000 jobs across various locations, and Associated British Foods, owner of Primark, noted a decrease in clothing purchases tied to job security fears.

Despite job cuts, wage growth continues to accelerate, with reports indicating private sector earnings increased by 6 per cent year-on-year in the three months to November, excluding bonuses. This rate is double that which the Bank of England believes aligns with the inflation target.

Retailer Next highlighted that minimum wage increases produce a "ripple" effect throughout the wage structure, incentivising employers to maintain higher pay for promotions.

Andrew Wishart from Berenberg bank labelled the situation a "massive headache" for the Monetary Policy Committee, which is anticipated to lower interest rates from 4.75 per cent to 4.5 per cent at their upcoming meeting on February 6.

The minimum wage rise is creating complications for low-wage employers, who are unable to offset the £25 billion increase in National Insurance contributions by reducing wages.

Some businesses may still manage to pass on rising costs to consumers, contributing to services price inflation remaining above 4 per cent and overall inflation surging past 3 per cent later this year.

While the Bank of England is likely to lower interest rates shortly to shield workers from adversely high inflation, it may halt this strategy later in the year according to Wishart.

Other economists speculate that wage growth might decelerate throughout the year as firms cease competition for higher-paid roles.

LSZHSBC’s Martins claims the historic trends for wage increases are now fading. Companies may initially raise prices after April's changes; however, other strategies such as automation, wage compression, and offshoring could ultimately alleviate inflation pressures.

Yet, wage growth may not decline rapidly enough to satisfy the Bank of England.

According to a poll conducted by Incomes Data Research, four-fifths of employers intend to provide lower pay awards this year compared to 2024, with most stating that the NIC rise has influenced their decisions.

Nonetheless, over half of the undecided employers expect to offer increases exceeding 3 per cent, while around 40 per cent of agreed pay deals are yielding increases of at least 4 per cent.

Elliott Jordan-Doak from Pantheon Macroeconomics pointed out that the conflicting pressures from payroll tax rises, global uncertainties, and tariff threats present a challenging scenario for the Monetary Policy Committee.

This conflict implies that in a low-growth environment necessitating rate cuts, inflation challenges still warrant caution, and tax increases are having a more substantial impact on jobs and prices than anticipated.

If this trend continues, unemployment might need to rise for the Bank of England to maintain inflation control.

Martins concluded that wage growth might take longer to decrease than the Bank of England prefers, attributing ongoing pressures to government policy rather than a strained labour market.