As everyone awaits the Budget on Wednesday, an important story has appeared in the media: Barclays has reduced its workforce by 5,000 in 2026 because of AI-driven efficiencies.[1] While this will not surprise tech watchers who have been predicting this for years, it will have nasty repercussions for government revenues.
HMRC will face a major revenue black hole if computers replace the UK’s legally employed workforce. An employee on an average wage of £37,500 will pay £4,986 in income tax, £1,994 in National Insurance Contributions (NIC), and their employer will pay £4,875 in Employer National Insurance Contributions (ENIC) as well as contribute about £800 to £1,000 to a workplace pension. Thus, an average-wage employee costs their employer £43,275, of which the employee gets £30,520, while the government gets £11,855.
Now let’s do the calculation again but for bank employees. The average salary of bank employees is about £70,000. They would pay £15,432 in income tax and £3,411 in NIC, and their employer would pay £9,750 in ENIC, making an average bank employee worth £28,593 to the Exchequer when employed.
| Per employee, per year | Average employee | Average bank employee |
|---|---|---|
| Salary | £37,500 | £70,000 |
| Income tax | £4,986 | £15,432 |
| Employee NIC | £1,994 | £3,411 |
| Employer NIC | £4,875 | £9,750 |
| Total to the Exchequer when employed | £11,855 | £28,593 |
| Cost to the Exchequer when unemployed | At least £17,000 | At least £33,700 |
The government has a strong incentive to encourage businesses to employ humans rather than replace them with AI; it would not only lose the tax and NI revenue if an employee loses their job, but the government would also pay at least £5,100 in unemployment benefits, as well as benefits for housing support, childcare, free school meals, court fees, and lost income from reduced council tax. Each unemployed average-wage employee costs the government at least £17,000 a year, while an unemployed bank employee costs the Exchequer at least £33,700.
The ideal employee
But employers have an equally strong incentive to replace staff with AI and cut their employment costs. These aren’t just wages and National Insurance costs; companies also have to pay for HR managers, accounting staff, receptionists, cleaners, regulatory compliance officers, ESG compliance officers, and DEI compliance officers. Companies also have to pay rent, lighting and heating bills, building maintenance, and business rates. But not when they employ computers. Computers can work in the dark; they prefer unheated buildings; they don’t take smoking breaks, coffee breaks, or waste time gossiping at the water cooler; and they don’t need HR, DEI, or ESG officers. They can work all night and all weekend. Seriously, as an employer, what’s not to like?
Timing is everything
Former Chancellor of the Exchequer Rachel Reeves’ timing was appalling: she increased the cost of employment by raising wages and employers’ National Insurance contributions, just as AI was beginning to reduce or replace many white-collar desk jobs. Now AI is moving to replace lawyers, scientists, researchers, and engineers. Like bankers, these are professions where the UK excels, and successive UK governments had assumed would absorb workers displaced by the loss of manufacturing industries. Now that looks like a disastrous miscalculation.
And this is the government’s dilemma: by making employment more expensive through higher wages and higher National Insurance contributions, the government is encouraging all businesses, not just banks, to replace human staff with AI, even though income tax and National Insurance contributions are the main sources of government revenue; together, they provide 57% of total UK tax revenue.
UK banks aren’t just cutting their staff; some may leave the country
The problems for government revenues are not just due to AI replacing staff. Rumours suggest Chancellor John Healey will impose a ‘windfall’ tax on UK banks in Wednesday’s Budget. This might sound like a good idea to a politician, as banks can’t vote. But although banks can’t vote in elections, they can vote with their feet, or at least with their exchange listing, their place of effective management, and their tax residence. We only need to look at the oil and gas industry to see how a windfall tax can backfire and kill the entire industry.
Admittedly, taxes on the oil and gas industry are over the top, at 78%, so it is not surprising that an industry that paid £9 billion in tax in 2022/23 after the windfall tax was introduced, paid just £3.9 billion in 2025/26 and is predicted to pay just £100 million by 2029/30 as oil and gas companies decommission their UK wells rather than continue operating in the UK. Even the £9 billion oil companies paid in 2022/23 was £6 billion lower than the OBR predicted the new ‘windfall’ tax rate would collect. Even the £9 billion was mainly due to higher oil prices; the so-called ‘windfall tax’ added only £2.6 billion.
Increasing the total tax rate on oil and gas companies from 40% to 65%, then to 75%, and finally to 78% seemed like a good idea to Sunak, Hunt, and Reeves at the time, but the higher tax rate did not result in higher tax revenues. Instead, the tax rate rises destroyed the industry. An industry the country relies on, and one everyone now wishes we had fostered as the world faces a diesel shortage.
A windfall tax or a winding-up tax?
But now, incredibly, Healey thinks he can impose a ‘windfall’ tax on the banks without driving them out of the country. He should be warned: banking is much more mobile than oil wells and gas fields.
The banking industry paid £43.3 billion in taxes in 2024/25; this is about 4.3% of total UK government tax revenue. Banks not only pay the standard 25% corporation tax, but they also pay the Bank Levy and the Bank Surcharge, as well as employer National Insurance Contributions, irrecoverable VAT, business rates, and other taxes. This equates to a 46.6% tax rate.
The £43.3 billion in taxes includes the £20.9 billion bank employees pay in PAYE and employee NIC. You may think this isn’t a payment by the bank, but if the bank weren’t based in the UK, its employees wouldn’t pay this money to the UK Exchequer.
Banking is a major UK industry and pays more than ten times the tax the oil and gas industry raises. But if Healey decides to increase bank taxes, bankers, like oil and gas companies, may decide there are better places to do business.
According to PwC, the total bank tax rate in New York is just 27.9%, and if the banks want to stay in a European time zone, the total bank tax rate in Dublin is 28.9%.[2] Interestingly, while the New York rate has been stable since 2024, the UK rate has risen from 45.8% in 2024 to 46.6% in 2026.
Until a new industry is willing and able to pay as much tax as banking, the government needs to do whatever it takes to keep banking in the UK.
Employment on the edge
So how does the Chancellor keep banks in the UK and keep them employing humans? An obvious solution for the Chancellor is to lower employment taxes by reducing the Employer NIC rate, and paying for this by ironing out the camel’s hump in the employee NIC rate. Unusually, the UK’s employee NI rate is 8% on income between £12,570 and £50,270, then drops to just 2% on income above that. I was once told this was because the government had collected enough NI to pay for the state pension by taxing only this income range, but that was when employee NI rates were 12%, employer NI rates were 12.8%, and the baby boomers were still working.
For some inexplicable reason, Jeremy Hunt, the Chancellor before Rachel Reeves, had equally bad timing. Hunt cut the employee NI rate to 10% and then to 8% just as the last baby boomers were reaching retirement age, and most older members of that generation were already retired. Hunt somehow believed that a smaller pool of PAYE workers, paying a lower NIC rate of 8%, could fund the pensions of a larger pool of former workers who had paid higher NI rates until 2024.
Taxing employment
Hunt’s calculations were badly wrong. Employee NI receipts have dropped from £65 billion in 2022/23 to just £49 billion in 2025/26, about where they were ten years ago. Meanwhile, due to Rachel Reeves’ increases, employer NI contributions have increased by £40 billion over the same period and raise more than twice the amount they did ten years ago. Revenue collected from employer NIC is almost three times that from employee NIC.
Incredibly, employer NI also raised 50% more than corporation tax in 2025/26. Employer NI has become the main way we tax businesses in the UK rather than on their profits. However, it makes no sense to tax a necessary business expense such as staff costs. This clearly disincentivises hiring human staff. For context, NI contributions from PAYE employees are about a sixth of PAYE income tax revenue, even though only employees benefit from National Insurance.
Companies already contribute to workplace pensions, so why force them to contribute to the state pension when their employees already contribute through NIC? Better to encourage businesses to keep employing people by making it cheaper to do so. Besides cutting the NIC rate and raising the threshold where this payment begins, the government could also get rid of Diversity, Equity and Inclusion (DEI) regulations and Environmental, Social and Governance (ESG) regulations. This would cut company costs without lowering taxes. Win-win.
Payroll job losses
From July 2025 to July 2026, payroll jobs fell by 185,000. This reflects a fall in private-sector retail and hospitality jobs and an increase in government-sector employment in areas such as health, education, and administration. Government-sector employees also pay income tax and NIC, but unlike private businesses, they don’t pay corporate tax. Also, the revenue needed to pay public sector salaries must come from private-sector taxes.
A fairer distribution of National Insurance contributions would be to lower the employer rate and increase the employee rate to a standard rate on all income above the tax threshold. This would be more progressive than the current 8% and 2% system, which favours higher earners, and importantly, it would raise more money. Employer NIC is currently a straight 15% on all income above £5,000. This increased just two years ago from 13.8%, and the threshold was lowered from £9,100 to £5,000.
Lowering the employer NIC threshold has been as devastating as the rate increase for retail and hospitality businesses, whose employees often work part-time or casually and whose wages were below the old threshold, so their employers didn’t need to pay this cost.
Keeping the revenue rolling in
It seems crazy that we tax businesses for employing people. We need to make employing people in the UK as cheap as possible; if not, the welfare bill will balloon. Businesses not only pay taxes on their profits, but by employing people, they also help reduce the welfare bill. Barclays will not be the last company to announce it is replacing staff with AI. Cutting employers’ NIC and unnecessary regulations will help businesses keep employing people.
The government will raise more in corporate taxes from companies that make higher profits because their employment taxes are lower. But the worst possible outcome for the government would be a company with lower costs because it has replaced its staff with AI bots.
Notes
[1] Barclays cutting 5,000 jobs as it increases reliance on AI – BBC News
[2] PwC 2025 UK Finance, Total Tax Contributions of the UK banking sector and international tax comparison, October 2025, (Link)
