Westminster’s tax on jobs will hurt Scotland's economy

The Westminster government talks about growth - yet Westminster's tax on jobs will damage Scotland’s economic growth. It is also being put through in such a way as to hurt Scotland unfairly.

If Scotland was an independent country controlling its own taxes it would not put through a damaging last minute tax that seems calculated to wreck previous financial planning.

This move by Westminster is punishing the Scottish government for paying more to doctors, nurses and teachers. There is no way the Scottish government could have predicted this additional cost  - it was even in Labour’s manifesto for the 2024 general election that they would not raise National Insurance. 

Scottish public sector workers have had a pay rise of an average of 5% in real terms in the last five years while pay in England has been flat. That means the impact of the employers’ NI hike is worse in Scotland. 

The UK Government is only going to compensate Scotland for the tax rise’s effect on public services by offering it a percentage of the English bill. But Scotland has more doctors, nurses etc per head - partly because of its geography, as a large country with a dispersed population. The cost of the rise to the public sector in Scotland including the NHS, emergency services, police, prisons etc is £535 million. But the amount it is getting from the UK is only expected to be about £350 million. 

Businesses, councils, charities and not-for-profits are also all warning that new National Insurance rules, which come into force in the next tax year starting April 5, are going to hurt them badly. Organisations of every kind from across Scotland will be negatively impacted, from care homes to yoga studios, and for some it will be the straw that breaks the camel’s back. 

Here are some of the problems the new tax is causing for Scotland  - outlined in a cross party debate in the Scottish Parliament last week: 

 

Seven out of ten Scottish businesses said the changes will impact their performance in 2025. 

They said they will have to:

  • Freeze or slow recruitment
  • Cut hours
  • Postpone wage increases
  • Postpone capital investment 

The Westminster government is acting without consultation and even ignoring evidence that this will harm growth across the UK. Here are some key points:

 

1) Public and third-sector impact

  • We have already seen that the compensation from the UK government penalises Scotland for paying public sector workers more
  • The impact will be felt very strongly in the health and care sectors - NHS primary care providers in Scotland from pharmacies to GPs say it will cost them £40 million a year. 
  • Scottish councils say the rise is equivalent to a 3% increase in council tax
  • The Scottish Council for Voluntary Organisations calculates that the tax hike will cost the third sector in Scotland cost  £75 million a year 
  • GP services, care homes, and hospitals will all be affected - this kind of tax increase is normally fully compensated but this time it won't be according to the BMA
  • Scottish Colleges warn that they will struggle to maintain existing services
  • Scottish Housing Associations calculate the rise will swallow £15 million a year from their budgets
  • Almost 50 organisations across Scottish society wrote to Chancellor Rachel Reeves explaining that they will have to reduce their services if they don’t get help to pay this tax.

 

2) Private sector impact

  • 75% of Scottish businesses think their performance will be negatively impacted in the coming year
  • The Scottish Grocers’ Federation calculates it will add £2400 a year to the cost of a full time staff member
  • Scottish retailers have calculated that the NI changes will cost £190 million a year to their sector
  • 75% of Scottish retail Chief Finance officers said that the changes meant prices would rise and workers would have their hours cut, and that they would look to automate more functions

 

3) Process - the UK government has avoided consultation and failed to take advice even from its own advisory bodies

  • Chancellor Rachel Reeves did not consult with the Scottish Government before deciding on these changes. 
  • The Labour Manifesto for the 2024 General Election said there would be no increases in NIC’s
  • The UK government’s own impact assessment is that this change will reduce jobs and increase prices. 
  • The Office of Budget Responsibility predicts it will reduce the number of economically active people in the economy
  • The Resolution Foundation calculated that the lowest-paying sectors such as social care and hospitality will be hardest hit. 
  • There was very little lead-in time for organisations to plan and adjust 

 

What are the changes?

The threshold for employers to start paying National Insurance is being lowered from £9,100 to £5,000, with the contribution rate rising from 13.8 percent to 15 percent. That will take effect in the next tax year which starts on April 5. 

That means organisations that employ low-paid part-time workers will be hard hit - from baristas to youth workers. Many will struggle to deal with this new blow - particularly as Scottish businesses already have to pay the highest energy bills in the world. 

 

There is a major shortfall in the Scottish budget thanks to the tax on jobs

The Scottish Government estimates the increase in employers' National Insurance contributions will cost about £550m for public sector workers. But a wider calculation that takes in people who will be affected in arms-length organisations like childcare, higher education or social care puts the cost up to £750m. 

The Westminster government has said they will add just £330 million to the Scottish budget to cover the changes. That leaves a black hole in the finances. 

Scotland is being hit by these tax raises because it pays public sector workers more and for hiring more doctors, nurses and midwives per head. This tax could almost have been designed to punish Scotland for raising the wages of front-line workers.

This was brought in with almost no planning and no lead in time, in a way that the Scottish government could not have foreseen this extra cost.

 

This damaging tax will shrink not grow Scotland’s economy

The Westminster government constantly talks about growth - and yet many of their policies seem designed to shrink the Scottish economy. The recent ‘growth plan’ had only bad news for Scotland. They have done nothing to address Brexit’s ongoing damage. They have offered  £200 million for Grangemouth - which will not prevent the refinery from closing - while spending much more on backing the company’s move to a European base in Antwerp. 

It is now clear that the ill-thought-out tax on jobs will make it harder for businesses to plan, to invest, and to hire staff. 

Public sector organisations and charities that provide frontline services - like hospices and care homes - are warning that they cannot find the money for this tax and provide their current level of services.

This tax on jobs will have a chilling effect on Scotland’s economy. It was thrown at the Scottish government with no warning or consultation and no recognition that it will hurt Scotland worse than the rest of the UK. It will impact the wellbeing of Scotland’s people. Scotland can do better.