The sweeping fiscal changes announced by Chancellor Rachel Reeves in her Budget will hit SMEs and business owners hard as the government seeks to plug a ‘£22bn black hole’ in the public purse.
In one of the most hotly anticipated Autumn Budgets in recent years, the Chancellor announced the government’s plan to achieve its core aims of stability, investment and change.
However, support for working people and public services has come at the cost of SMEs, which look set to experience a significant financial squeeze.
There had been a lot of speculation around this Budget, with many SMEs predicting a tough time as the government pledged to avoid raising Income Tax and VAT for working people.
While the Budget placed growth and balance at its core, SMEs – making up 99.9% of UK businesses – are going to struggle.
The Chancellor announced a rise in National Insurance Contributions (NICs) – up to 15% from April 2025.
A reduction in the secondary threshold from £9,100 to £5,000 was also revealed – substantially increasing the NICs of employers at every level.
In isolation, these measures will represent a marked increase in the cost of being an employer. But businesses are also facing a rise in the National Living Wage (NLW), currently set at £11.44, to £12.21 per hour, from next April – an increase of up to £1,400 a year for a full-time worker.
Following this was the announcement of a single adult rate of NLW, amounting to a phased extension of the NLW to all workers over the age of 18.
We cannot overstate the impact this will have on small businesses. With only six months to mitigate these rising costs, many businesses will have no choice but to reduce their staffing levels or make cuts to investment in other areas.
Sectors which rely on flexible staff, often on hourly pay, will be hit the hardest – and many of these have already been impacted disproportionately by the rising cost of living and the pandemic, including hospitality, retail and leisure businesses.
The Chancellor announced some support for these industries – including a 40% relief on business rates in 2025/26.
She also plans to raise the employment allowance from £5,000 to £10,500, meaning an estimated 865,000 businesses won’t pay NICs.
However, these are a small minority compared to those SMEs left to bear the costs on their own, which could have a staggering impact on employment in key industries.
Those looking to sell a business have also been a target for tax revenue, with the immediate introduction of a rise in Capital Gains Tax (CGT) rates.
The Budget raised the lower rate of CGT to 18% immediately, while the higher rate increased to 24%.
Compounding the increase, Business Asset Disposal Relief (BADR) will also rise – remaining at 10% in 2024/25, before rising to 14% in 2025/26 and 18% in 2026/27.
Business owners are now facing a ticking clock. Those already looking to sell their business may need to accelerate the process to maximise the benefit of BADR, and those tempted to sell by rising costs have little time to plan.
As a final sting in the tail for business owners, unspent pensions are being pulled into the scope of Inheritance Tax (IHT) from April 2027, creating a double-edged sword where individuals are potentially struggling to pass on large portions of their wealth.
The Chancellor’s mantra of “invest, invest, invest” has certainly materialised in this Budget, with funding for green energy, public services, regional improvement and manufacturing.
However, it’s unlikely to be enough to offset the very real challenges faced by SMEs that often lack the cash reserves to meet inflating costs.
Rachel Reeves’ message was very clear when she said the government was asking businesses “to contribute more” – but many will have come out of the Chancellor’s first Budget feeling unsupported, with difficult choices to make of their own.
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