Businesses Hit by the Budget: How Small Businesses Will Bear the Heaviest Burden

Small businesses saw their costs rise on Wednesday as Chancellor Rachel Reeves unveiled a £40bn tax raid to help close the gap in the nation’s finances.

He introduced tax increases in the form of higher National Insurance contributions, as well as a higher minimum wage and changes to capital gains tax.

Businesses were already reeling from the disproportionate tax burden they faced, as Reeves ramped up pressure on his efforts to deliver on his promise to keep taxes at their current level for “workers.”

We look at the changes that small businesses will face in the coming years following the Autumn Budget.

Increase in National Insurance contributions

While Reeves was determined to improve productivity and growth, she turned her attention to investing in the economy.

But that money has to come from somewhere and it’s the small businesses that will foot the bill.

The biggest tax increase came from employers’ National Insurance contributions (NICs), which will rise from 13.8 per cent to 15 per cent next April.

The payment threshold has also been reduced from £9,100 a year to £5,000 from next year.

At the same time, the government is increasing the employment benefit from £5,000 to £10,000 and removing the £100,000 threshold, meaning all employers will be eligible.

The government says 865,000 employers will not pay NICs next year.

For those that do, it represents a sharp increase in the amount businesses will now have to pay and may deter some owners from hiring additional staff. This would be a blow to Reeves’ plans to boost economic growth.

Rich Wagner, CEO and founder of Zempler Bank, said: “Our clients tell us that the biggest threat to their businesses’ growth is the UK economy and if the private sector grows more slowly or businesses refrain from making decisions , then this is not good for anyone.’

Fiona Fernie, partner at Blick Rothenberg, added: The ‘Rachel Reeves’ increase in employers’ NICs may not (technically) break the Government’s manifesto promises.

“However, it is also unlikely to foster business growth. In fact, the increased cost of recruiting staff is likely to have a negative rather than a positive impact, either in terms of reduced staff recruitment or lower wages, assuming employers follow the rules meticulously.’

Emma Jones, founder and CEO of Enterprise Nation, said small businesses now need to make tough decisions.

‘While we are pleased to see that some concessions have been made for smaller businesses who employ people on the minimum wage without having to pay national insurance, this will not affect either side when it comes to the £25bn tax rise about the companies announced.

“Small businesses are resilient in the face of adversity, but will need help to rethink their strategy to cope with a greater tax burden.”

> Fall Budget: Rachel Reeves’ big changes and what they mean for you

Increase in minimum wage

An increase in the living wage will also increase labor costs for small businesses.

Reeves announced that the national living wage will rise by 6.7 per cent to £12.21 an hour for over-21s and £10 for 18-21 year olds from next April.

While this is good news for employees, it only adds to the pain for businesses still struggling to recover from the pandemic, particularly in the hospitality sector.

Heather Self, partner at Blick Rothenberg, said: “All of these companies operate on very low margins and most will need to increase employee pay above the national living wage to maintain pay gaps.”

He added: ‘A person on the national living wage, which rises to £12.21 in April 2025, who works 40 hours a week will get a pay rise from 1 April 2024 of £1,602 a year. The additional cost to employers in terms of increased income tax, employees’ national insurance and employers’ national insurance will be £690.

Changes to capital gains tax

Businesses had anticipated huge increases in capital gains tax and Disposal of Business Assets Relief, formerly Entrepreneurs’ Relief, which did not come to light.

Fortunately for small businesses, the main changes were aimed at investors, with an immediate increase in the base rate from 10 to 18 per cent, and from 20 to 24 per cent for higher rate taxpayers.

However, Reeves also announced some important changes to business asset disposal relief in the coming years.

CGT rates for business disposals will rise from 10 to 14 per cent next April and equal the lower rate of 18 per cent on 6 April 2026.

Toby Tallon, tax partner at Evelyn Partners, said: “While the increases in CGT rates were not as extreme as some feared, these increases could still deter entrepreneurs from starting businesses in the UK and this could slow growth. of the UK economy.

‘Historically, CGT has been charged at lower rates than income tax to reward entrepreneurs for the considerable risks they take in starting and growing businesses. The Chancellor’s announcement today reduces that incentive for business owners to invest in the UK.

The support limit will also be capped at £1 million, but the increase in the CGT rate could mean a bill increase of up to £80,000 for those planning to sell their businesses after April 2025, according to PwC.

Christine Cairns, tax partner at PwC, adds: “While this keeps the corporate sales tax rate below the new headline CGT rate of 24 per cent, it is still a significant and painful increase for many, and one that could lead to that business owners rethink their plans to sell their businesses in the short term.”

Business Fee Relief

There was some good news for small businesses buried in Reeves’ budget as business rates relief was extended, albeit at a lower level.

Reeves announced an extension to business rates for 2025/26 and committed to permanently reducing business rates multipliers for retail, hospitality and leisure properties from 2026/27.

Labor will also freeze the small business multiplier and provide 40 per cent relief on bills for these properties, up to £110,000.

While the extension is welcomed by small businesses crippled by rising costs, others suggest the changes do not go far enough.

Nik Moore, head of business rates at Rapleys, said: “With the 75 per cent relief for hospitality ending in April 2025 and becoming a 40 per cent relief, this still means a cost wall of around “500 million pounds to hit the sector.” No further action appears to be taking place until 2026/27, when a new two-tariff system will be delivered. But there are no guarantees. Again.

Rachel Brennan, founder of Essex-based floristry business Blossom and Grow, added: ‘Three years ago, I set up my own floristry business, Blossom and Grow. Like many small business owners, I have felt hampered by a business rates system that is no longer fit for purpose.

‘While extending business rates relief provides some help, reducing it to 40 per cent will continue to put pressure on finances. It’s disappointing that we won’t see permanently lower tax rates until at least 2026.’

Business rates reform, as promised in Labour’s election manifesto, seems a long way off at the moment, as Reeves shores up the nation’s finances and public services.

Moore added: “It is not surprising that there is no immediate reform of business rates, given the much talked about black hole – after all, why would they act quickly to reduce a tax collection that has high compliance? But in the meantime, “This unfair and failed system continues to be a burden for many companies.”