2025 to be most expensive year on record for firms employing minimum wage workers, says CPS

Since the minimum wage was introduced in 1999, the tax wedge has fluctuated. In 2010, it stood at 18 per cent, before reducing to 11 per cent in 2015, primarily due to an increase in the income tax personal allowance.

Although this increased over time, owing to wages rising faster than the personal allowance thresholds, by 2024 the amount of tax paid per minimum wage worker stood at 17.5 per cent of salary - still lower than in 2010.

However, according to the Centre for Policy Studies, the rise in employer's National Insurance in last year’s Budget and the reduction in the threshold at which it is paid mean that 21.3 per cent of the cost of employing a full-time worker on the minimum wage will go in tax.

Daniel Herring, Centre for Policy Studies tax and fiscal researcher, said: “The more of an employee’s salary is owed in tax - whether paid by the employee or directly by the employer - the more costly it is for businesses to create and sustain jobs.

“By making it more expensive to employ people, the hikes in employer's National Insurance disproportionately affect the lowest paid or those who are looking to move back into work after being economically inactive.”

The Centre for Policy Studies is a centre-right think tank which was co-founded by Margaret Thatcher in the 1970s.

The research comes after Chancellor Rachel Reeves announced a rise in Employers’ national insurance contributions in the Autumn Budget, as well as a lowering of the threshold at which businesses begin paying the contributions.

The Government has said the move has been made in order to help “fix the foundations of the public finances and invest in public services”, and argues that the change will raise revenue for the NHS, as well as increasing funding for contributory benefits such as the State Pension.

The Government also argues that the move will contribute to its announced £22.6 billion in additional day-to-day spending over two years for the Department of Health and Social Care, including the NHS.

In its latest report, however, The Centre for Policy Studies said that coupled with increases to the minimum wage, the National Insurance rises will cost businesses £2,367 more to employ a full-time worker on the minimum wage than it did in 2024.

The Centre for Policy Studies said this would have an “obvious impact” on hiring decisions for the lowest paid.

For higher wage positions, the increased cost of hiring workers translates into lower wages over time. For those on the minimum wage, where salaries cannot fall, businesses will instead hire fewer workers, the centre argues.

A spokesman for the Treasury told the PA News Agency: “We delivered a once-in-a-parliament budget to wipe the slate clean and deliver the stability businesses so desperately need. The independent Office for Budget Responsibility confirmed that it delivers lower unemployment and higher wages over the coming years, and more than half of employers will either see a cut or no change in their national insurance bills.”