Companies axe workers at fastest pace as payroll tax raid bites

Businesses across the United Kingdom have been forced to shed jobs at the swiftest rate seen since 2021, as Rachel Reeves’s £25 billion payroll tax increase takes hold. According to the Bank of England’s latest survey, employment dipped by 0.5 per cent during the three months to August, revealing a significant contraction in the UK labour market.

The central bank’s decision-makers panel, which polled 2,000 chief financial officers, also found that businesses intend to continue job cuts over the next twelve months at the most rapid pace since October 2020. The retail and hospitality sectors have borne the brunt of these redundancies, with the hospitality industry highlighting a “staggering” loss of employment. UK payrolled jobs have dropped by more than 160,000 since the budget’s implementation, as reported by HM Revenue & Customs.

Retailers are struggling to offset the £7 billion in new costs introduced at the latest budget. The British Retail Consortium has warned that ongoing tax pressure could prompt more businesses to make tough decisions regarding their workforce and store presence. More than half of the roles lost since the budget have emerged in low-wage sectors, which are particularly vulnerable to increases in payroll tax.

The British Chambers of Commerce indicated that surging employment costs have triggered a hiring freeze, compounding worries of a stagnant labour market. Employers have been left with scant alternatives after government commitments not to raise individual taxes, national insurance contributions for employees, or VAT. Such pledges have significantly limited fiscal manoeuvrability, as observed by Lord King of Lothbury, former Governor of the Bank of England, who described the government’s position as ‘boxed in’.

While official government surveys on the labour market have suffered from declining response rates, the Bank of England has increasingly relied on its decision-makers panel for guidance. Expectations for inflation over the next year have risen to 3.4 per cent, exceeding the Bank’s 2 per cent target, and recent figures show annual inflation reached 3.8 per cent in July. The central bank predicts inflation may peak at 4 per cent in September, a figure that will inform pension and benefit adjustments in the coming spring.

Interest rates are expected to remain steady at 4 per cent for the rest of the year, with long-term government borrowing costs recently reaching levels not seen in three decades. This evolving economic backdrop places more pressure on policymakers as businesses brace for further fiscal tightening.