The Autumn Budget 2024, presented by Chancellor Rachel Reeves, has introduced several substantial changes aimed at stabilizing the UK’s public finances. With increases in employers’ National Insurance contributions and a higher capital gains tax, among other measures, the Budget has brought relief and concern to businesses. While the intent behind these changes is to improve the nation’s economic resilience, small businesses in particular face a unique set of challenges and opportunities as a result.
Key measures affecting small businesses
The 2024 Fall Budget contains a mix of tax reforms, public spending adjustments and changes to wage policy. The two most notable measures that affect small businesses are:
Increase in employer contributions to national insurance
Employer NICs have been increased, affecting businesses of all sizes. The increase translates into a higher cost per employee, adding pressure to small business payrolls at a time when economic uncertainty remains a major factor.
Capital gains tax increase
The Budget’s decision to increase capital gains tax affects not only individual entrepreneurs and investors but also small businesses that rely on reinvested profits and retained earnings for their growth. For many small business owners who may be contemplating the sale of assets or even entire businesses, the tax increase poses a direct impact on bottom line returns and future planning.
Increase in the living wage at the national level
The increase in the national living wage to £12.21 an hour for those aged 21 and over aims to address the cost of living crisis. For small businesses, however, this wage increase represents an additional operating expense. Since many small businesses rely on labor-intensive labor, particularly in sectors such as retail, hospitality, and social care, additional payroll costs are expected to impact profit margins.
Tax Allowances and Allowances
While the budget is largely characterized by tax increases, there are some reliefs for small businesses. Certain business rates exemptions have been extended, aiming to alleviate property-related costs for small businesses operating in physical locations. However, these reliefs may not be enough to offset the broader cost increases caused by other fiscal measures.
Strain on cash flow and profit margins
Small businesses typically operate with limited cash reserves and are sensitive to changes in operating costs. NICs increase and the higher minimum wage translates into higher payroll expenses, which could significantly impact cash flow. Many small businesses may find it difficult to absorb these costs without affecting their profitability. For companies already facing rising costs in energy, materials and logistics, this additional burden could slow growth and limit room for reinvestment.
To maintain profitability, small businesses can consider measures such as price increases, although passing costs on to customers is not always feasible, especially in competitive markets where price sensitivity is high. As a result, small businesses could see a reduction in their growth potential, which would affect their ability to expand, hire additional staff or invest in innovative projects.
Possible decline in business confidence
The Budget measures have led to a decline in business confidence, with surveys showing confidence at its lowest level in four months. Small business owners often rely on confidence in future business prospects to make investment decisions, from expanding product lines to investing in new facilities. As the current economic climate shows signs of instability, business owners may adopt a “wait and see” approach, which could limit innovation and reduce overall economic dynamism.
Changes in hiring practices.
As labor costs rise, small businesses may reevaluate their hiring strategies, potentially focusing on retaining current employees rather than expanding their workforce. The wage increase, while a positive step for employees, is a substantial cost for employers, particularly those who employ part-time or low-wage workers. Additionally, with the increase in NICs, the overall cost per employee increases, discouraging companies from expanding their teams.
Some small businesses may consider alternative employment structures, such as hiring freelancers or exploring automation to limit payroll costs. However, the shift to automation is only feasible in certain industries and may be limited by the initial investment required, which can be a barrier for small businesses with limited cash flow.
Impact on business activity
The capital gains tax increase is also likely to affect business activity and investment. For those considering selling their business or assets, rising CGT rates reduce net returns, which may deter some from starting new ventures. Entrepreneurs who want to exit or reduce their involvement in the business may now find it less attractive to sell, given the reduced financial incentive.
Furthermore, the increase in CGT could discourage angel investors and venture capitalists, who often play a crucial role in funding small businesses, especially in the early stages. With lower after-tax returns, investors could become more selective, which could reduce the availability of capital for innovative startups and small businesses.
Long-term considerations and adaptations
The full impact of the Fall 2024 Budget will manifest over time and small businesses will need to adopt strategies to mitigate these challenges. For example, companies could focus on improving productivity to offset increases in wages and taxes. This could mean investing in digital tools, training programs or more efficient business processes, all of which can reduce costs and improve service delivery.
Additionally, collaboration between small businesses could become more important. Many small businesses already rely on partnerships to share costs and expertise, and the pressures introduced by the Budget could accelerate this trend. For example, shared workspaces, joint marketing initiatives, or cooperative purchasing agreements could help companies remain competitive and manage costs. Women, in particular, can access support to develop their businesses in Business Women’s Club.
Government support, such as access to low-interest loans or grants for innovation and productivity improvement projects, will be crucial to helping small businesses cope with these changes. Authorities could also consider extending targeted tax breaks to particularly hard-hit sectors, such as retail and hospitality.
The Autumn Budget 2024 presents a mixed picture for small businesses in the UK. While the Budget is intended to stabilize public finances, the rise in NICs, capital gains tax and the minimum wage have introduced new costs and challenges for small businesses, many of which are still grappling with the impacts. of the pandemic and inflation. In response, small businesses may need to innovate, streamline their operations, and build resilience to withstand these financial pressures.