Dissecting British Payroll Tax Hikes

With tariffs rapidly ascending as headlines’ top risk to the UK economy and employment, earlier headwinds have taken a backseat. But given how long British businesses have warned of ill effects from the UK’s higher minimum wage and increased Employer National Insurance Contribution (NIC), both of which take effect this month, we doubt these issues will be absent from headlines for long. Business groups, the Bank of England (BoE) and other outlets warn higher Employer NIC will raise businesses’ costs, fueling resurgent inflation, reducing hiring and hitting UK GDP (and, by extension, markets). But the UK’s tax history shows this isn’t true.

The logic behind the dreary forecasts might seem sound. Like the US’s payroll tax, Employer NIC is a tax businesses pay on their employees’ salaries—only where the US’s tax funds Social Security, the NIC funds the National Health Service. Since a high Employer NIC makes businesses’ employment costs go up, 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 employment is an economic driver—weaker GDP.

These are pretty easy to pick apart on theoretical and conceptual grounds. Economic data overwhelmingly show employment data lag growth—they don’t lead it. While higher costs might make businesses economywide want to raise prices to preserve margins, that doesn’t actually work unless aggregate demand is strong enough to support it. That means you would need 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.^[i] That was an era of low inflation. And as for employment, businesses still have to 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.

But it is also pretty easy to disprove with cold, hard data, thanks to the UK’s robust history of tax changes. 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 it is important to remember the backdrop then: a global fight against hot inflation that 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. This is also when the UK had its infamous and painful Winter of Discontent. Next to these major events, a small payroll tax hike pales. The key, overall, 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 as the Tech bubble burst.

As for markets, 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, in GBP.^[ii] While there are some negative returns sprinkled in, they occurred during global corrections and bear markets. These weren’t UK-specific reactions to a tax hike—they were the UK participating in 2022’s shallow global bear market and 2011’s steep slide as the eurozone debt crisis unfolded. Coincidence, not causality.

The UK economy isn’t firing on all cylinders. Recent data have been mixed, and we empathize with the pressure households and small businesses are under as costs rise again (the household energy price cap also rises this month). But the sentiment here appears too dour relative to reality—a brick in a bull market wall of worry. That is probably cold comfort amid this broader, tariff-induced selloff, but we think it speaks to the potential hidden in UK stocks as the year progresses.