Dissecting April’s Tax Hikes

With publications we follow repeatedly touting tariffs as the top risk to the UK economy and employment, earlier headwinds have seemingly taken a backseat. But given how long we have observed British businesses warn of ill effects from this month’s higher minimum wage and increased Employer National Insurance Contribution (NIC), we doubt these issues will be absent from headlines for long.^[i] Business groups, the Bank of England (BoE) and other outlets we follow warn higher Employer NIC will raise businesses’ costs, fuelling resurgent inflation, reducing hiring and hitting UK GDP (and, by extension, markets).^[ii] But we think the UK’s tax history helps show why this likely isn’t true.

The logic behind the dreary forecasts is simple to follow. Since a high Employer NIC raises businesses’ employment costs, conventional wisdom says businesses will raise prices, trim headcount or some combination of the two. Hence, the forecasts for faster inflation, rising unemployment and—based on the belief we often see that employment is an economic driver—weaker GDP.

We find these pretty easy to pick apart on theoretical and conceptual grounds. Economic data overwhelmingly show employment data lag growth—they don’t lead it.^[iii] Whilst higher costs might make businesses economywide want to raise prices to preserve margins, our research shows that doesn’t actually work unless aggregate demand is strong enough to support it. In our view, that would require a swift money supply increase parallel to costs going up. The UK doesn’t have that right now, with broad M4 money supply growing 4.2% y/y—a prepandemic rate.^[iv] That was an era of low inflation.^[v] And as for employment, we find businesses still must maintain operations to keep meeting customer demand, which probably explains why BoE research once found Employer NIC increases tend to reduce hours worked, not headcount.^[vi]

But we think it is also pretty easy to disprove with cold, hard data, thanks to the UK’s robust history of tax changes.^[vii] Parliament keeps a handy record of Employer NIC all the way back to 1975, including the statutory rate and various surcharges that came and went through the early 1980s. This, along with the country’s trove of economic data, lets us check whether higher Employer NIC has actually, consistently had the feared effect on employment and prices. Spoiler alert: It hasn’t.

Exhibit 1: Employer NIC Hikes Aren’t Economic Poison

Source: UK Government, FactSet and Office for National Statistics, as of 4/4/2025.

Hikes did coincide with faster inflation in the late 1970s, but our research suggests the latter stemmed from the oil shock as well as the after-effects of price controls and monetary policy errors on both sides of the Atlantic earlier that decade.^[viii] This also aligned with the infamous and painful Winter of Discontent. Next to these major events, a small employer tax hike pales, in our view. To us, the overarching point is that there is no consistent history of inflation and unemployment jumping or GDP shrinking. Heck, the UK avoided recession entirely in 2000 and 2001, after 1999’s hike, despite the US enduring a recession (period of contracting economic output) as the Tech bubble burst.^[ix]

As for markets, we think the history is pretty fine. Median returns for UK stocks are positive in the 3, 6 and 12-month periods following hikes—3.2%, 16.7% and 18.8%, respectively.^[x] Whilst there are some negative returns sprinkled in, they occurred during global corrections (sentiment-driven declines of around -10% to -20%) and bear markets (prolonged, fundamentally driven broad equity market declines of -20% or worse).^[xi] Based on our research and analysis, these weren’t UK-specific reactions to a tax hike—they were the UK participating in 2022’s shallow global downturn and 2011’s steep slide as the eurozone debt crisis unfolded.^[xii] Coincidence, not causality, in our view.

Our research suggests the UK economy isn’t perfect right now. Recent data have been mixed, in our view, and we empathise with the pressure households and small businesses may be under as costs rise again (the household energy price cap also rises this month).^[xiii] But we think the sentiment here appears too dour relative to reality—a brick in a bull market’s proverbial wall of worry.^[xiv] That is probably cold comfort amidst this broader, tariff-induced selloff, but we think it speaks to the potential hidden in UK stocks as the year progresses.^[xv]