The Labour government's welcome 4.1 per cent increase to the state pension this year is under mounting fiscal pressure, with experts warning that rising unemployment could undermine the tax revenues needed to fund it.
The Triple Lock Tension
Thanks to the triple lock mechanism, the full new state pension now pays £230.25 per week, following the April increase. The policy guarantees payments rise by the highest of 2.5 per cent, average earnings growth, or inflation. However, this uplift comes at a precarious time for the public finances.
Peter Gallanagh, CEO of accounting services group Azets UK, highlighted the growing strain. He stated that a combination of higher unemployment and stalled wage growth could significantly weaken the Treasury's tax base, specifically hitting receipts from Income Tax and National Insurance.
"That creates increasing fiscal tension at a time when state pension and benefit spending is under pressure from demographic change and inflation," Gallanagh explained. "Stabilising employment levels is therefore not only an economic priority but a fiscal one."
Employment Tax: A Delicate Balancing Act
Frances Lewis, a partner at law firm Osborne Clarke, echoed these concerns, pointing to the sensitivity of the UK labour market. She warned that increases in the cost of hiring, such as through higher National Insurance contributions, can make businesses more cautious and directly impact job creation.
"When the cost of hiring goes up, businesses inevitably become more cautious – and that feeds directly through to job creation," Lewis said. She also noted that changes to employment taxation can push more workers into self-employment, freelancing, and contracting, further eroding the traditional payroll tax base.
"The Government faces a difficult balancing act," Lewis emphasised. "Increasing National Insurance contributions may raise revenue in the short term, but if it discourages hiring, it risks eroding the very tax base that it relies on. Stability and predictability in employment taxes are what give businesses the confidence to invest and grow."
Calls for Targeted Support and Long-Term Clarity
In light of the challenging data, Peter Gallanagh urged the Chancellor to focus on measures that protect jobs and encourage business investment. He warned that a continued slide in confidence heightens the risk of a deeper economic slowdown.
Gallanagh proposed specific interventions to alleviate the pressure, stating: "Targeted relief on the cost of employing staff - for example, adjustments to employer National Insurance - could help protect jobs and stimulate hiring."
He concluded that providing clearer long-term commitments on growth-focused tax incentives would be crucial to unlocking business investment that has currently been paused, thereby securing the economic activity needed to support the state pension in the years to come.
