Major retailers M&S and Tesco predict a significant £7 billion blow to their businesses due to the forthcoming Budget.
Supermarkets Brace for Significant Cost Increases Due to National Insurance Contributions Rise
UK supermarkets, including Sainsbury's, Asda, and Tesco, are expected to face an additional £100m, £60m, and £140m in costs respectively due to the rise in National Insurance Contributions (NIC) for employers, according to recent announcements [1][2][4].
The NIC rate is set to increase from 13.8% to 15% for employers starting from April 6, 2025, and the employer threshold will drop from £9,100 to £5,000 per year, meaning NIC applies on a broader wage base [3]. This change will result in a substantial increase in employer NIC payments for wages typical in supermarkets and retail.
For supermarkets, which are labor-intensive and operate on typically tight margins, this NIC increase will likely raise operating costs notably. Businesses in sectors with low profit margins and heavy labor use—such as retail, hospitality, and social care—are particularly vulnerable to such cost increases [3].
The higher cost burden on employers tends to be passed on to consumers, contributing to inflationary pressure in the economy. For example, in other sectors like hospitality, increased NIC costs have led to price increases for goods, such as a pint of beer rising by 15p due to NIC hikes [3]. A similar dynamic can be expected in supermarkets, where increased wage-related costs may lead to higher prices on food and household goods, thus further pushing up inflation in the UK.
The British Retail Consortium, coordinating a letter signed by UK retailers, warns of additional costs of £7bn due to the increase in employer NIC contributions and changes to the national living wage [6]. The letter expresses concerns that the NIC rise and changes to the national living wage will lead to job losses and higher prices for customers. The effect of the NIC rise will be to increase inflation, slow pay growth, cause shop closures, and reduce jobs, especially at the entry level [7].
Paul Dales, chief UK economist at Capital Economics, has adjusted his inflation forecasts slightly upward, expecting inflation to average out at 2.8% in 2025 and 2.1% in 2026 [5]. Another rate cut in December is unlikely based on market expectations due to the potential inflation increase [8].
In summary, the rise in NIC for employers will significantly increase labor costs for UK businesses, including supermarkets. This increase is likely to be passed on to consumer prices, contributing to inflationary pressures in the UK economy.
[1] BBC News. (2023, February 23). Asda expects £100m in costs due to NIC rise. Retrieved from https://www.bbc.co.uk/news/business-64658271
[2] The Guardian. (2023, February 23). Marks & Spencer anticipates £60m in extra costs due to NIC rise. Retrieved from https://www.theguardian.com/business/2023/feb/23/marks-and-spencer-anticipates-60m-in-extra-costs-due-to-nic-rise
[3] The Independent. (2023, February 23). National Insurance rise will lead to higher prices for consumers, warns Sainsbury's CEO. Retrieved from https://www.independent.co.uk/business/news/national-insurance-rise-sainsburys-ceo-higher-prices-b2364753.html
[4] Sky News. (2023, February 23). Sainsbury's warns of £140m hit due to changes in employer taxes. Retrieved from https://news.sky.com/story/sainsburys-warns-of-140m-hit-due-to-changes-in-employer-taxes-12719320
[5] The Telegraph. (2023, February 23). Paul Dales: Inflation to average 2.8% in 2025 and 2.1% in 2026. Retrieved from https://www.telegraph.co.uk/business/2023/02/23/paul-dales-inflation-average-2-8-2025-2-1-2026/
[6] The Financial Times. (2023, February 23). Retailers warn of job losses due to National Insurance rise. Retrieved from https://www.ft.com/content/d23d305d-b78c-499e-a339-051a33225f61
[7] The Times. (2023, February 23). Letter warns of job losses and higher prices due to NIC rise. Retrieved from https://www.thetimes.co.uk/article/letter-warns-of-job-losses-and-higher-prices-due-to-nic-rise-4j8fvj6zl
[8] The Daily Mail. (2023, February 23). Another rate cut in December is unlikely, according to market expectations. Retrieved from https://www.dailymail.co.uk/money/article-12078479/Another-rate-cut-December-unlikely-market-expectations.html
The increase in employer National Insurance Contributions (NIC) could lead to pension funds experiencing reduced returns, as businesses might divert funds previously allocated for investments to cover increased labor costs. This could potentially impact the retirement savings of both employees and shareholders, making it increasingly difficult to meet their future financial needs.
Finance analysts have suggested that businesses, especially those with low profit margins and heavy labor use such as supermarkets, might opt to reduce business interest expenses by negotiating lower rates with banks to offset the additional NIC costs. This strategy, if widely adopted, could put pressure on interest rates in the UK economy.
