Businesses have taken a hefty hit from Labour’s Budget announcement on the 30th of October. This comes in the form of a 1.2% rise in the National Insurance rate paid by employers, which is estimated to raise £25bn for the Treasury, and a rise in the National Minimum Wage. Business owners are also unlikely to be happy with the Capital Gains Tax rise of 4%, although this increase will come as little surprise. Below, we outline how the Chancellor’s Budget will impact businesses and specific sectors.
National insurance (NI)
The Chancellor announced a 1.2% rise in the rate paid by employers, taking the figure to 15%. At the same time, she lowered the threshold at which they will start paying these contributions from £9,100 to £5,000. The extra amount raised for the Exchequer is estimated to be £25bn, a gross figure before any consequential negative impacts on Corporation Tax receipts or benefit payments.
As a concession to smaller businesses with total NI liabilities of £100,000 or less, the Employment Allowance they can claim against their employers’ NI liabilities has been raised from £5,000 to £10,500 in each tax year.
The question is what employers will do in the face of an extra tax burden that will directly affect their bottom lines unless they take steps to alleviate it. Their options are straightforward: raise prices, cut pay or staff, or a combination of any two or all three. The first will be difficult for companies operating in price-sensitive markets. The second is difficult in practical terms, except for new hires. The third threatens their ability to operate efficiently or effectively.
National minimum wage (NMW)
The immediate run-up to the Budget also brought another unwanted hit to firms’ profitability. Following the publication earlier this year of the Low Pay Commission’s recommendations for the next rise in the NMW due in April 2025, the Chancellor confirmed that the NMW would rise by 6.7% for workers aged 21 and above. Younger workers between 18 and 20 get an even bigger boost of 16.1%. Apprentices get the biggest bump of all, a hike of 18%. The trade body UKHospitality warned that this would add £1.9bn to the industry’s wage bill.
The ripple effect of these increases is less well-publicised, as those higher up the pay scale press for differentials to be protected.
The Employment Rights Bill
This draft legislation was introduced to Parliament on 10 October 2024. It will improve workers’ rights and have cost and operational implications for employers, in addition to its potential effect on business confidence.
Business rates
The business community has been complaining about the unfairness and scale of business rates for many years. Yet, while successive governments have promised reform, no action has been taken. Now, the Chancellor has extended certain reliefs but cut the discount from 75% to 40%. Without the continuation of the current reliefs, which would have expired in March 2025, the rates bill for smaller premises would have quadrupled. Now, they will only double.
Capital gains tax (CGT)
In the run-up to the Budget, the more florid sections of the media were awash with scare headlines predicting that hundreds, if not thousands, of entrepreneurs would flee the UK to avoid CGT increases. Even more sober business pages have talked of panic selling of businesses to avoid tax rises and to take advantage of Business Assets Disposal Relief (BADR) in case it was cut.
In the event, the Chancellor raised CGT rates, but only modestly, with the lower rate increasing from 10% to 18% and the top rate from 20% to 24%. She also confirmed that the BADR lifetime limit of £1m would remain unchanged.
Will insolvencies rise post-Budget?
Business failures in the worst-affected sectors (hospitality, retail, and entertainment) represent close to a quarter of all corporate insolvencies. For the twelve months ending August 2024, the total for England and Wales was 5,845 out of 25,126.
After the Budget measures and other announcements, it is hard to see how failures in these key industries won’t rise substantially as the extra cost burdens bite into profitability, suck out liquidity and threaten viability. Most at risk will be smaller businesses, which lack the financial reserves and resources to withstand the extra financial burdens.
Will private sector business investment be impacted?
It is common ground among all economists that the UK’s business investment record has been appalling for decades. We examined this issue in detail last year.
Apart from ‘fixing the foundations,’ the new government’s central economic mantra has been that achieving significant and sustained growth is paramount. However, this can only happen with substantial investment to boost productivity.
In the run-up to the Budget, there have been many anecdotal tales of delayed projects and expansion plans being put on hold. Now it seems that businesses will also have to address the £25bn NI hit to their costs, higher wage bills from the NMW and doubled Business Rates before they can even consider committing financial and management resources for investment.
While the Chancellor may have stated the aims of the Budget were to “invest, invest, invest!” It is difficult to see how that will be realised when looking at the overall pronouncements today.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.