(Bloomberg) — UK business groups warned the country’s new Labour government against raising a key tax on employers after Prime Minister Keir Starmer and Chancellor of the Exchequer Rachel Reeves both signaled a hike is being considered at the budget later this month.

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Executives on Tuesday warned that raising the payroll tax — known as national insurance — would hurt economic activity, with a particular impact on the retail and hospitality sectors. That came after both Starmer and Reeves suggested their electoral promise not to raise NI applied only to the component paid by workers, and not to the rate levied on employers.

“It would be a really damaging way to raise the money,” Neil Carberry, chief executive officer of the Recruitment and Employment Confederation, told Bloomberg Radio. “National Insurance isn’t a tax on profits. It’s a tax on activity. It falls most heavily on labor-intensive firms. Those tend to be retailers, hospitality, health firms, consumer-facing businesses,” he added, describing the proposal as a “real challenge” for high streets.

The push-back illustrates the difficult decisions Reeves faces as she seeks to use her budget to plug what she’s called a £22 billion ($29 billion) void in the public finances this year, without holding back growth or breaking election manifesto commitments ruling out rises on “working people” to income tax, national insurance and value-added tax — the Treasury’s main revenue-raisers.

While Labour could expect to face claims from the opposition Tories that doing so would contradict its manifesto wording, government officials argue the document left enough leeway to raise the payroll tax for businesses. Moreover, the Tories attacked Labour during the campaign for not ruling out a rise in NI for employers.

Reeves has said that tax rises are coming at her Oct. 30 budget, and she and Starmer this week have given their strongest indication yet that they are considering increasing the business component of the payroll tax.

“We were very clear in the manifesto that we wouldn’t be increasing tax on working people,” the premier told BBC TV on Tuesday, when asked if the election commitment on national insurance applied to employers as well as employees.

The premier’s language was a repeat of what Reeves told reporters at an international investment summit hosted in London on Monday, and will be seen as a clear hint that the government is considering the move.

Lifting the main employer rate of national insurance by one percentage point would raise £8.45 billion in the 2025-26 financial year, according to estimates published by His Majesty’s Revenue and Customs.

“If we see a rise in national insurance contributions paid by employers, that’s going to increase the cost of taking someone on, of creating a job, and that will make it more difficult for businesses,” Rain Newton-Smith, director-general of the Confederation of British Industry, told BBC radio on Tuesday. She said such a rise would in particular affect firms “who are creating a lot of jobs across our hospitality sector, our hotels, our pubs.”

That view was backed up by Kate Nicholls, chief executive of UK Hospitality. “An increase would particularly hammer sectors like hospitality, where staffing costs are the biggest business expense,” she said. “Hospitality businesses are much less able to stomach yet another cost increase, when they’re already managing increases in other areas like wages, food, drink and energy.”

Meanwhile Craig Beaumont, executive director at the Federation of Small Businesses, told Bloomberg that such a tax rise would fall hardest on the UK’s one million small employers.

“It’s these who create local jobs and take on those furthest from the labor market,” Beaumont said. “A hike would mean less growth, an acceleration of the dip in jobs we are seeing in UK small businesses, and downward pressure on pay and pension contributions – all directly hitting working people.”

Newton-Smith also flagged potential consequences for economic growth and the money the Treasury has to fund Britain’s already-stretched public services. “If those overall increases in costs of hiring aren’t matched by higher productivity, then it makes it harder for businesses to create the jobs and the growth that we need to really fund our public services,” she said.

–With assistance from Caroline Hepker, Jack Sidders and James Woolcock.

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