The chancellor is set to increase the amount employers in the UK pay in National Insurance to raise £20bn for public services including the NHS.
Rachel Reeves is also expected to use Wednesday’s Budget to lower the threshold for when employers start paying the tax, but is not likely to introduce the levy to employer pensions contributions.
Employers currently pay National Insurance of 13.8% on a worker’s earnings above £175 a week.
The move is thought to be the single largest revenue raiser of next week’s Budget, but other tax rises are also expected.
National Insurance contributions are the UK’s second-largest revenue stream behind income tax. It is paid by workers and the self-employed on earnings and profits, and by employers on top of the wages they pay out.
Speculation has been growing about the tax rises Labour will announce in its first Budget in almost 15 years, with the chancellor claiming there is a £22bn “hole” in the public finances.
Other than National Insurance for employers, the freezing of income tax thresholds could be extended, meaning more people are “dragged” into paying tax, or higher rates of tax, as their wages rise and cross the unchanging thresholds.
The government is looking at increasing tax on asset sales, such as shares and property, and changes to inheritance tax.
Last week, Reeves signalled businesses would face an increase in National Insurance, when she said Labour’s election pledge not to increase contributions on “working people” related to the employee element, as opposed to the sum paid by employers.
The chancellor is understood to have decided on all major measures to be announced in Wednesday’s Budget and that the National Insurance rise has been earmarked for the NHS.
Any changes to the tax can be introduced quickly, within weeks of a Budget, through digitalised payroll systems, meaning revenues can also be generated at speed.
A two percentage point rise in National Insurance to take the employer rate to 15.8%, for example, would raise about £18bn a year according to published Treasury data.
However, with Reeves also expected to change the threshold businesses start paying the levy, such an a figure would probably be higher.
The chancellor may face claims she is levying a tax on jobs, and breaking at least the spirit of the Labour manifesto. Sources however say she has resisted internal pressure to simply increase the amount employees pay in National Insurance, which was the party’s specific election promise.
At a International Monetary Fund meeting in Washington on Thursday, Reeves told the BBC that it was important to “get a grip on day-to-day spending” by making sure it was paid for through tax receipts.
She said the UK could not “continue on the path” of current public spending given the state of public services such as prisons and NHS, adding there “would not be a return to austerity”.
But the move will raise questions about whether this is the right time to burden employers with what is widely considered to be a tax on jobs.
Businesses argue an employers’ National Insurance rise will make hiring staff and creating jobs harder and ultimately hit the government’s main goal of growth.
The government will also have to defend how such a decision sits with its commitment not to raise taxes on “working people”.
While the increase would fall on employers, it could affect workers down the line if wage rises are restricted. Companies could also cut back on hiring due to the added costs.
The rise in National Insurance could also have an impact on other tax revenues, for instance if it results in smaller wage rises. If businesses absorb the extra costs, profits could be lower and the amount they pay in corporation tax could be less.
The prime minister has insisted working people will not be hit by tax rises – but he has struggled to define who exactly he is seeking to protect.
The Conservatives have accused Labour of “reinventing” what counts as a working person, as the Budget approaches.
