What the OECD numbers actually show

The Organisation for Economic Co-operation and Development's 2025 Taxing Wages report puts the UK tax wedge for an average-earning single worker at 32.4 per cent, up from just under 30 per cent a year earlier, according to the OECD's published data. That 2.45 percentage-point jump is more than sixteen times the OECD-wide average rise of 0.15 points and outpaces every other country in the 38-nation study, as reported by Business Matters Magazine. Only Estonia (1.95 points), Germany (1.34) and Israel (1.09) posted increases above a single percentage point.

In absolute terms, the UK wedge still sits below the OECD average of 35.1 per cent and well below France (approximately 47 per cent), Germany (around 47.9 per cent after its own increase) and the Netherlands (roughly 37 per cent), based on the OECD's most recent comparative tables. But the velocity of the change is what has alarmed economists. The OECD warned that a widening wedge "tends to reduce incentives to work and hire by reducing take-home pay and increasing employers' labour costs."

Over the past decade, the UK wedge had been broadly stable in the 30–31 per cent band, edging down slightly after the personal allowance was raised to £12,570 in 2021-22. The 2024 Budget reversed that trajectory in a single fiscal event.

Where the cost lands hardest: threshold cut versus rate rise

The increase stems from two measures in Chancellor Rachel Reeves's October 2024 Budget, according to HM Treasury documents. First, the employer national insurance rate rose from 13.8 per cent to 15 per cent. Second, the secondary threshold, the point at which employer NICs begin, was cut from £9,100 to £5,000. Personal income tax thresholds remain frozen at 2021-22 levels until 2031, compounding the effect through fiscal drag.

The threshold cut matters more than the rate rise for lower-paid roles. Working through the arithmetic at three salary bands illustrates the point.

£20,000 part-time or entry-level role

Under the old rules, employer NICs applied to earnings above £9,100 at 13.8 per cent: (£20,000 − £9,100) × 0.138 = £1,504. Under the new rules, NICs apply above £5,000 at 15 per cent: (£20,000 − £5,000) × 0.15 = £2,250. The additional cost per head is £746 a year, a 49.6 per cent increase in the employer NIC bill for that worker.

£30,000 median-salary role

Old: (£30,000 − £9,100) × 0.138 = £2,884. New: (£30,000 − £5,000) × 0.15 = £3,750. Extra cost: £866 per head, a 30 per cent rise.

£50,000 mid-management role

Old: (£50,000 − £9,100) × 0.138 = £5,644. New: (£50,000 − £5,000) × 0.15 = £6,750. Extra cost: £1,106 per head, a 19.6 per cent rise.

The pattern is clear: the proportional hit is steepest on the lowest-paid staff, precisely the roles that dominate hospitality, social care, retail and cleaning, sectors where SMEs are most concentrated.

For a 20-person firm paying an average of £25,000, the aggregate increase is roughly £16,000 a year. For a 100-person firm at the same average, it is approximately £80,000.

The government raised the Employment Allowance from £5,000 to £10,500 alongside the NIC changes, according to HMRC guidance. That offsets the first £10,500 of an employer's total NIC liability. For a micro-business with five employees on £20,000, the entire additional cost (around £3,730) is absorbed. But the allowance is a fixed sum, not per-head. A 20-person firm at £25,000 average salary sees the allowance cover roughly two-thirds of the extra burden; by the time headcount reaches 30–35, the relief is marginal relative to the total bill.

Labour-market fallout so far

Since the Budget was unveiled in October 2024, payrolled employment has fallen by 143,000, according to official figures cited in the OECD report and ONS data. The economic inactivity rate, the proportion of working-age adults neither in work nor seeking it, rose to 21 per cent in the three months to February, up from 20.7 per cent in the previous quarter, according to ONS labour-market statistics.

Vacancy data tells a complementary story. Sectors with the highest share of lower-paid roles, accommodation and food services, retail, and health and social care, have seen the sharpest pullback in job postings since autumn 2024, ONS vacancy survey data shows. Employers appear to be absorbing existing workloads rather than hiring replacements.

The OECD has repeatedly urged successive governments to tackle the "large compliance costs" baked into Britain's tax code, arguing that complexity itself is a drag on hiring and growth.

Whether the Office for Budget Responsibility or the Treasury will propose further threshold adjustments ahead of the next fiscal event remains unclear. The OBR's March 2025 Economic and Fiscal Outlook did not signal any relief measures, and HM Treasury has not publicly indicated a change of course on the NIC parameters or the income tax freeze timeline.

Practical responses for SME operators

With the policy framework unlikely to shift before 2026 at the earliest, operators face a period of adaptation. Several levers are available.

Workforce-mix review

The threshold cut penalises every payrolled worker from the first pound above £5,000. Firms with a high share of part-time staff on £10,000–£20,000 face the steepest proportional increase. Some operators are consolidating hours into fewer, fuller-time roles to reduce the per-head threshold cost, though this trades flexibility for efficiency.

Pay-structure redesign

Salary-sacrifice arrangements for pension contributions, cycle-to-work schemes and other HMRC-approved benefits reduce gross pay and therefore the NIC base for both employer and employee. For a £30,000 employee sacrificing £3,000 into a pension, the employer saves £450 a year in NICs at the new rate. Across a 50-person payroll, that is £22,500, enough to offset a meaningful share of the additional burden.

Automation and process efficiency

The rising cost of each marginal employee strengthens the business case for automation in repetitive tasks: self-checkout, scheduling software, automated bookkeeping, AI-assisted customer service. The calculus is not about replacing people wholesale but about raising output per head so that fewer incremental hires are needed as demand recovers.

Pricing and margin discipline

For consumer-facing businesses, passing costs through is constrained by sluggish demand and rising energy prices. Operators report that selective menu or range rationalisation, reducing low-margin SKUs and concentrating on higher-contribution lines, is a more viable route than blanket price increases.

None of these measures eliminates the cost. They redistribute it across the P&L. For finance directors modelling 2025-26 budgets, the critical input is the per-head arithmetic above, applied to their own workforce profile. The OECD's numbers confirm what payroll teams already suspected: the UK's employment-tax trajectory has shifted materially, and planning assumptions need to reflect that shift.