The United Kingdom has recorded the steepest increase in employment-related taxes among advanced economies, according to the latest annual analysis from the Organisation for Economic Co-operation and Development (OECD). The findings highlight mounting pressure on workers and employers following recent fiscal policy changes that have significantly increased payroll costs.
The OECD report shows that the so-called “tax wedge”, the gap between what employers spend on hiring staff and what workers take home in pay, rose to 32.4% last year for an average UK worker. That is up from just under 30% the previous year, marking an increase of 2.45 percentage points. Across the OECD group, the average rise was just 0.15 percentage points, placing the UK far ahead of all other advanced economies in terms of pace of increase. Estonia, Germany and Israel were the only other countries to record rises above one percentage point.
While the UK tax wedge remains below the OECD average of 35.1%, the rapid acceleration has raised concerns among economists about its impact on hiring and wage growth. The OECD noted that higher labour taxes tend to reduce incentives for both employment and job creation by increasing costs for employers while lowering take-home pay.
The rise has been linked to measures introduced in the Chancellor’s October 2024 Budget. Employers’ National Insurance contributions were increased from 13.8% to 15%, while the threshold at which businesses begin paying the tax was reduced from £9,100 to £5,000. The change has had a particular impact on sectors reliant on lower-paid and part-time staff, including hospitality, retail, and social care.
At the same time, income tax thresholds have been frozen until 2031, meaning more workers are gradually pulled into higher tax bands as wages rise. This effect, known as fiscal drag, has added further pressure on household incomes.
Labour market data suggests early signs of strain. Payrolled employment has fallen by 143,000 since the employer tax changes were announced, while the economic inactivity rate has risen to 21% in the three months to February.
Small and medium-sized enterprises have been especially affected, with many reporting higher staffing costs alongside weak consumer demand and rising borrowing expenses.
The OECD also warned that wider economic headwinds could deepen the pressure. It recently projected that global instability linked to the US and Israeli conflict with Iran could weigh heavily on UK growth and push inflation higher than other major economies.
Economists say the combined effect of rising labour taxes and global uncertainty is likely to keep hiring subdued, leaving businesses facing a difficult outlook as they adjust to higher long-term employment costs.
