Employer NIC Rises Set To Force Increase In UK Tax Wedge

The latest analysis from the Global Payroll Alliance (GPA) suggests that the recent increases to Employer National Insurance Contributions (NICs) could result in the UK struggling to incentivise employment, as illustrated by the tax wedge.

What is the tax wedge?

The tax wedge represents the gap between what employers pay for labour and what employees take home, comprising income tax, employee social security contributions, and employer contributions. A high tax wedge can discourage hiring and reduce take-home pay, while a lower wedge encourages job creation and economic growth—though often at the cost of reduced government revenue.

The UK Tax Wedge

GPA’s analysis of OECD taxation data shows that in 2024, the UK had a relatively low tax wedge of 29.4%, broken down as:

• 13.9% income tax
• 5.3% employee contributions
• 10.2% employer contributions

This was below the OECD average of 34.9%, which included 13.4% income tax, 8.1% employee, and 13.4% employer contributions.

Nations with the largest tax wedges

The highest tax wedges were seen in:

• Belgium: 52.6% (20.3% income tax, 11% employee, 21.3% employer)
• Germany: 47.9%, with a high 17.3% employee contribution
• France and Italy: 47.2% and 47.1%, driven by large employer contributions (26.7% and 24%)

The UK tax wedge is now on the rise

The bad news for the UK is that when 2025’s data is published, its tax wedge is likely to have increased. This is due to the increase in Employer National Insurance Contributions that took effect in April 2025 which have significantly increased staffing costs for the nation’s businesses.

This increase to the UK’s tax wedge means businesses may be less inclined to hire new employees. We have already seen this play out, with small businesses struggling to stay afloat due to inflated hiring costs, and large businesses radically reducing their headcounts.

Melanie Pizzey, CEO and Founder of the Global Payroll Alliance, says:
“The UK has previously benefited from a relatively moderate tax wedge compared to many OECD nations, which has helped support job creation and business investment. However, the recent rise in Employer NICs will already be shifting that balance. As staffing costs rise, so too will the tax wedge, putting pressure on employers and potentially dampening appetite for hiring.

“This change comes at a time when businesses, particularly SMEs, are already facing stifling cost challenges on multiple fronts. An increasing tax wedge risks tipping the scale, leading to reduced job opportunities and slower economic recovery. For policymakers, this should be a prompt to consider the broader impact of employment taxation on business confidence and labour market resilience.”