The Chancellor will increase the amount that employers in the UK pay into National Insurance to raise £20 billion for public services, including the NHS.
Rachel Reeves is also expected to use Wednesday’s draft budget to lower the threshold for employers to start paying taxes, but is unlikely to introduce the levy on employers’ pension contributions.
Employers currently pay National Insurance of 13.8% on an employee’s earnings over £175 per week.
The move is expected to be the largest source of revenue in next week’s budget, but other tax increases are also expected.
National insurance contributions are the UK’s second largest source of income after income tax. It is paid by employees and self-employed people on their income and profits, and by employers in addition to the wages they pay.
Speculation is growing over the tax rises Labor will announce in its first Budget in almost 15 years, with the Chancellor claiming there is a £22bn “hole” in the public finances.
Apart from social security for employers, The freeze on income tax assessment limits could be extendedmeaning more people will be “pushed” into paying taxes or higher tax rates as their wages rise and exceed the fixed thresholds.
The government is considering increasing taxes on asset sales such as stocks and real estate, as well as changes to inheritance tax.
Last week, Reeves suggested that companies could expect an increase in Social Securitywhen she said that Labour’s election promise not to increase contributions for “workers” was linked to the employee component, as opposed to the amount paid by employers.
The Chancellor is understood to have agreed all the key measures to be announced in Wednesday’s Budget, including the National Insurance increase for the NHS.
Any tax changes can be implemented quickly through digitalized payroll systems, within weeks of the budget, so that income can be generated quickly.
A two percentage point increase in National Insurance to take the employer rate to 15.8%, for example, would raise around £18 billion a year, according to published Treasury data.
However, since Reeves is also expected to change the threshold at which companies must pay the levy, such an amount would likely be higher.
The Chancellor may be accused of imposing a tax on jobs in breach of at least the spirit of the Labor manifesto. But sources say she has resisted internal pressure to simply increase workers’ social security contributions, which was the party’s specific campaign promise.
At an International Monetary Fund meeting in Washington on Thursday, Reeves told the BBC it was important to “get a handle on everyday spending” by ensuring it was paid for through tax revenue.
She said the UK cannot “continue on the path” of current public spending given the state of public services such as prisons and the NHS, adding that there will be “no return to austerity”.
But the move will raise questions about whether this is the right time to hit employers with what is widely viewed as a tax on jobs.
Businesses argue that increasing employers’ social security would make it harder to hire staff and create jobs, ultimately hurting the government’s key growth goal.
The government will also have to defend how such a decision fits with its commitment not to increase taxes on “working people”.
While the increase would come at the expense of employers, it could later impact employees if wage increases are restricted. Because of the additional costs, companies could also cut back on hiring.
The increase in Social Security could also affect other tax revenues, for example if it leads to smaller wage increases. If companies absorb the additional costs, profits could be lower and the amount they pay in corporate tax could be lower.
The Prime Minister has insisted working people will not be hit by tax rises – but he finds it difficult to define who exactly he wants to protect.
The Conservatives have accused Labor of “reinventing” what counts as a working person as the Budget approaches.
