Businesses battered by Budget: How small corporations will bear the heaviest burden

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

She 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 at the disproportionate tax burden they faced, as Reeves heaped on further pressure in efforts to keep her promise to maintain taxes at their current level for ‘working people’.

We look at what changes small businesses will face in the coming years after the Autumn Budget. 

Increase in National Insurance contributions

With Reeves set on improving productivity and growth, she focused her attention on investment in the economy.

But that cash has to come from somewhere and it is small businesses that will pick up the bill.

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

The threshold at which is paid has also been slashed from £9,100 a year to £5,000 from next year.

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

The government says that 865,000 employers will pay no NICs next year.

For those that do, it marks a steep increase in the amount that businesses will now have to pay and may put some owners off from taking on additional staff. This would be a severe blow to Reeves’ plans to kickstart economic growth.

Rich Wagner, CEO and founder of Zempler bank said: ‘Our customers tell us that the biggest threat to growth in their companies is the UK economy and if the private sector grows more slowly or businesses hold back making decisions, then this is not good for anyone.’

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

‘However, neither is it likely to encourage business growth. Indeed, the increased cost of employing staff is likely to have a negative rather than a positive impact, either in terms of less staff recruitment or lower wages – assuming that employers follow the rules meticulously.’

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

‘While we are pleased to see some allowances have been made for the smallest firms that employ people on the minimum wage without having to pay National Insurance, it will not touch the sides when it comes to the £25bn tax hike on businesses announced.

‘Small businesses are resilient in the face of adversity, but they will need help to rethink their strategy to cope with an increased tax burden.’

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

Minimum wage rise 

An increase in the living wage will also add to labour costs for small businesses.

Reeves announced that the National Living Wage will increase 6.7 per cent to £12.21 per hour for over-21s and £10 for 18-21 year olds from next April.

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

Heather Self, partner at Blick Rothenberg said: ‘These businesses all operate on very low margins and most will need to increase the pay of employees over the National Living Wage to maintain pay differentials.’

She added: ‘An individual on the National Living Wage, which increases to £12.21 in April 2025, who works 40 hours a week will get a pay rise from 1 April 2024 of £1,602 per year. The additional cost for employers in terms of increased income tax, employee’s national insurance and employers’ national insurance will be £690.

Changes to capital gains tax 

Businesses had anticipated huge increases in capital gains tax and Business Asset Disposal Relief, previously Entrepreneurs Relief, which did not come to light.

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

However, Reeves also announced some major changes to Business Asset Disposal Relief in the coming years.

CGT rates for business disposal will rise from 10 to 14 per cent next April, and match the lower rate of 18 per cent by 6 April 2026.

Toby Tallon, tax partner at Evelyn Partners said: ‘While the increases in CGT rates weren’t as extreme as some feared, these hikes could still put off entrepreneurs from starting businesses in the UK and this could slow growth in the UK economy.

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

The relief limit will also be capped at £1million but the increase in the CGT rate could mean an increased bill 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 maintains the rate of tax on business sales below the new headline CGT rate of 24 per cent, it’s still a meaningful and painful increase for many, and one that could cause business owners to rethink their plans to sell their businesses in the short term.”

Business rates relief

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

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

Labour 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 firms crippled by rising costs, others suggest that the changes do not go far enough.

Nik Moore, head of business rates at Rapleys said: ‘Given the relief of 75 per cent for hospitality ends in April 2025 and becomes a 40 per cent relief, this still means a wall of cost of some half a billion pounds to hit the sector with no other action taking place by the sounds of it until 2026/27 when a new system with two rates has been suggested will be delivered. But 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’ve felt hampered by a business rates system that is no-longer fit for purpose.

‘Whilst the extension of business rates relief provides some assistance, its reduction to 40 per cent will still place a strain on finances. It is disappointing that we will not see permanently lower tax rates until at least 2026.’

The reform to Business rates, as promised in Labour’s election manifesto, looks a long way off at this point, as Reeves shores up the nation’s finances and public services.

Moore added: ‘It is hardly a surprising move that there will be no immediate business rates reform, given the much talked about black hole – after all, why would they move quickly to curtail a tax take that has high compliance? But in the meantime, this unfair and broken system remains a burden on many businesses.’