Government Contractors Shift Rising Labour Costs onto Treasury, Raising Concerns for Taxpayers

Major government contractors are pushing the financial burden of rising national insurance (NI) contributions and higher wages onto the Treasury, raising concerns about the impact on taxpayers. Leading cleaning, facilities management, and construction companies, including Churchill Group, Mitie, and Mace, are negotiating with Whitehall to pass on the costs of April’s employment-related tax increases.

Starting in spring 2024, employers will see an increase in NI contributions from 13.8% to 15%, along with a rise in the national living wage from £11.44 to £12.21 per hour. While private-sector providers with commercial clients may be forced to trim their workforce or implement other cost-saving measures, public sector contractors are seeking to secure higher rates on their government contracts. Many of these companies have contract clauses that allow for price reviews if labour costs rise due to legislative changes, while others are renegotiating deals to protect slim profit margins.

Churchill Group, which provides cleaning services for train companies under the oversight of the Department for Transport, has confirmed it will raise rates to offset the increased wage and NI costs. Mitie, another major contractor, expects to recoup around 60% of its additional NIC costs, estimated at £35 million, through similar pass-through clauses. Mace, a leading construction firm, is set to open discussions with government departments to recover additional costs related to building and infrastructure projects, including hospitals.

Government sources say they have little choice but to agree to these higher contract rates, fearing that cutting back on public services would be detrimental. However, concerns are mounting that the rise in outsourced contract prices will create a wave of cost increases across various sectors, including the retail industry. The Treasury’s analysis suggests that major retailers, such as Tesco and Amazon, will also face significant additional costs due to the NI changes.

Business groups, including the British Retail Consortium, have warned that the extra labour costs could lead to job losses in the private sector. The sheer scale of the increases may force companies to reconsider their staffing needs. However, Paul Nowak, general secretary of the Trades Union Congress, has dismissed these concerns, urging caution in accepting companies’ claims.

The Treasury remains confident that its budget will deliver economic stability, pointing to targeted business rate relief for the hospitality, retail, and leisure sectors, as well as a permanent lower business rate to be introduced in 2026. Despite the government’s assurances, taxpayers may ultimately feel the financial strain as contractors pass on these rising costs.