LONDON (Reuters) -Business confidence in Britain's services sector hit a two-and-a-half-year low in the quarter to May and cost pressures are ramping up partly as a result of employment tax rises, the Confederation of British Industry said on Thursday.

Its gauge of morale in business and professional services companies fell to -43% in May from -28 in February, its lowest since November 2022. The mood at consumer-facing services firms soured too, the CBI said.

Expectations for price increases grew in business and professional services firms at the fastest pace in two years, although they receded a little compared with the previous survey for consumer-facing services firms.

The CBI highlighted concern among companies about the 25 billion pounds ($33.78 billion) increase in social security contributions paid by employers, announced by finance minister Rachel Reeves last October, and a nearly 7% rise in the minimum wage, both which came into force in April.

"The double whammy of both cost and price pressure ramping up is particularly worrying, given the Bank of England's concern about the persistence of domestic inflationary pressures," Alpesh Paleja, deputy chief economist at the CBI, said.

"Businesses continue to cite the impact of higher employer NICs and the National Living Wage both hitting their own cost base and depressing demand from clients."

The BoE, which cut interest rates this month, is closely watching service prices as it tries to gauge the strength of underlying inflation pressures in the economy and the appropriate pace of further rate reductions.

The CBI's gauge of profitability expectations for the next quarter among business and professional services firms fell to -47% in the three months to May, the weakest reading since February 2020 and down from -36% in the previous quarter. Outside the pandemic, it was the lowest reading since November 2008.

Investment intentions, business volumes, and hiring cooled.

The survey was based on responses from 215 services firms collected between April 28 and May 14.

($1 = 0.7402 pounds)

(Reporting by Suban Abdulla, editing by Andy Bruce)