The Labour government’s £25bn hike in taxes paid by employers is not the main driver behind rising youth unemployment, a government minister told City AM. 

Baroness Jacqui Smith, the skills minister, said that changes in NICs and minimum wages have not been the main drivers behind a rise in unemployment rates for people under the age of 25. 

Speaking to City AM about funding for small businesses taking on apprentices, Smith argued that youth unemployment had been “largely stable” compared to a rise between 2022 and 2024 under the last Tory government. 

When asked if the tax hikes had had a worse impact than first expected, Smith said there was clear evidence that the big increase in youth unemployment came before Labour was elected. 

“Actually what has happened since then has been largely stable,” Smith said. “So it isn’t changes in NICs or minimum wage which has had the impact that you’re suggesting.”

She added: “I understand that businesses would rather not have had a NICs rise.

“I mean they also are quite keen that their workforce isn’t sitting on waiting lists for operations that are keeping them out of the labour market and that of course was what we were spending that money on. Secondly, for young people they’re not paying national insurance contributions anyway. And thirdly, actually the big increase in youth unemployment happened before we came into government, and we’re the government that’s actually taking action to bring that down.”

Tax hike contributes to ‘seven per cent rise in labour costs’

The youth unemployment rate for those aged between 16 and 24 was at 16.4 per cent in the three months to July. 

Under Labour, the rate has climbed leaped from 14.6 per cent. In 2022, the youth unemployment rate was at about 10 per cent. 

Separately, about 13.5 per cent of all young people aged between 16 and 24 are grouped as ‘Neets’, which includes unemployed people as well as those who are not in education or training. 

The government has looked to boost funding for its youth jobs guarantee and other grants where firms hire young people who have been claiming Universal Credit. 

Smith announced that small businesses would receive £2,000 for every young person taken on as an apprentice. A new government page would also connect businesses and young people looking for apprenticeship opportunities. 

Labour ministers have promised to offer 50,000 more youth apprenticeships over the next two years. 

Tax hikes have deterred hiring

Business groups including the British Chambers of Commerce and Confederation of British Industry have said that an effort to equalise the minimum wage for young people with a level for their older peers had deterred employers from taking on more inexperienced workers. 

The National Institute of Economic and Social Research estimated in early 2026 that the cost of hiring graduates rose by seven per cent as a result of higher taxes for employers and changes to the national minimum wage. 

Neets tsar Alan Milburn also said that the tax hike in Rachel Reeves’ first budget “added to the cost of employment” and hit high street venues harder.

A cross–party committee of MPs also called on the government to cut employers’ NICs for all new workers under the age of 25, saying there was “overwhelming evidence” from businesses that rising labour costs partly driven by new taxes had reduced job opportunities. 

Currently, employers do not have to pay tax on workers’ salaries for people hired under the age of 21. The CBI has urged the government to extend the exemption to all workers under the age of 25. 

On Wednesday, the Conservatives pledged to halve the NICs rate from 15 per cent to 7.5 per cent when firms hire young people between the ages of 21 and 24.

Shadow chancellor Andrew Griffith said: “Labour are destroying the future of our young people. Their jobs tax, employment red tape and minimum wage hikes have seen an explosion in the cost of employing a young worker. We will fix that.

“We will slash the tax on youth jobs in half to give young people the opportunities they deserve.”