Tax Incidence Transparency
Every tax is ultimately paid by people — the question is which people and how obviously
When a government imposes a tax on a business — say, employer National Insurance contributions — it is tempting to assume the business simply absorbs the cost. Paul Johnson's tax incidence framework dispels this. In the end, taxes are paid by people: employees (through wage suppression or freezes), customers (through higher prices), or shareholders (through lower profits and returns on their pensions and ISAs). There is literally no one else who can pay.
The political attraction of employer-facing taxes is precisely their opacity. When income tax appears on your payslip, the deduction is visceral and obvious. When your employer pays an extra 1.2 percentage points of National Insurance on your salary, most workers never see it. The money disappears before it reaches their hands. This opacity makes employer-levied taxes politically palatable even when the economic burden falls squarely on workers — which the OBR estimated accounts for roughly 61% of the employer NI rise.
Understanding this framework changes how you read every budget announcement. The question is not 'who is the tax formally charged to?' but 'who will adjust their behaviour — hiring, pay, pricing, investment — in response?' The answer reveals the real incidence.
- Every tax is ultimately paid by people — employees, customers, or shareholders — never by an abstraction called 'business'.
- The less visible a tax's formal incidence, the more politically attractive it is, regardless of its economic incidence.
- When employers face higher labour costs, the burden distributes across wages, prices, and profits in proportions the OBR can model but not control.
- Low-wage workers bear a disproportionately high relative cost from payroll-style taxes because the fixed-cost threshold effects are largest relative to their pay.
- Apparent tax relief for one group (e.g. 'workers') often means hidden cost to the same group channelled through a less visible route.
- Identify the formal incidenceEstablish who the tax is legally charged to — the employer, the consumer, the landlord, the investor. This is usually what the budget headlines report.Pro tipBudget table entries show the gross revenue number from the formal bearer. Always note this is the ceiling, not the net.
- Map the behavioural adjustment channelsAsk: what can the formal bearer do to offset the cost? For employers: reduce wages, reduce hours, freeze hiring, raise prices, cut investment, automate. Each channel shifts the economic burden to a different group.Pro tipThe lower the worker's wage, the larger the proportional impact of threshold changes — so run the maths separately for minimum-wage and median-wage employees.WarningAutomation and AI investment acceleration may become the dominant channel over a 3-5 year horizon, which standard OBR models underestimate.
- Identify the true bearersOnce the adjustment channels are mapped, the burden lands on: (a) employees via wage suppression, (b) customers via price rises, or (c) shareholders via lower returns. Shareholders include pension and ISA holders — so 'taxing business' can mean taxing retirement savers.WarningPart-time workers — disproportionately women — face asymmetric exposure when threshold changes affect the cost calculation per worker rather than per hour.
- Apply the OBR split as a calibrating anchorOBR modelling of the 2024 employer NI rise estimated 61% onto wages, ~23% onto profits, ~15% onto prices. Use these proportions as a starting anchor, then adjust for sector (labour-intensive vs. capital-intensive) and wage level.Pro tipFor labour-intensive, low-margin sectors (hospitality, retail), the profit margin may be too thin to absorb the 23% — so the wage and price shares rise.
- Communicate the true incidence clearlyWhen reporting or advising, name the actual bearers and approximate proportions. Resist the political framing that formal incidence equals economic incidence — this is the most common source of public confusion about tax policy.Pro tipThe phrase 'taxes on companies' is a category error in economics — companies are legal fictions; only people pay taxes.
Paul Johnson revealed his own finance director had emailed during budget week to say the employer NI changes would cost the IFS £100,000 per year — effectively wiping out its operating surplus.
Barrett cited FT reader comments from business owners in hospitality and retail describing immediate plans: pay freezes, hiring freezes, hour reductions, and contract restructuring via umbrella companies.
Contractors employed via umbrella companies already pay the employer NI share in their headline rate. The threshold reduction means they must renegotiate rates upward to avoid a net pay cut, or absorb it themselves.
Johnson explicitly noted that shareholders — the group absorbing ~23% of the NI burden — include anyone holding equities through pensions or ISAs, i.e. the vast majority of UK savers.
Paul Johnson, presenting IFS analysis during Budget week 2024, used the employer NI rise as a live case study. The IFS modelling showed the 25-billion headline raise would net far less once second-order effects on income tax, employee NI, and corporation tax receipts were counted. Johnson highlighted that western European countries have long relied on high employer social contributions — and labour economists have studied for decades how this cost distributes. Barrett reinforced this from the ground level: FT readers running businesses described immediate plans for pay freezes, hiring freezes, and hour reductions — the wage-suppression channel working in real time.