BUSINESS leaders gave mixed reactions to Rachel Reeves’s first Budget as Chancellor.
Although the increase in Employer National Insurance Contributions from 13.8% to 15% grabbed headlines, not least because it raised £25bn in tax revenue, most business bodies reacted positively to other measures in Wednesday’s Budget.
The Chancellor managed to balance the NIC hike with a number of measures to offset its hit. However, the retail sector responded with dismay to the NI rise and a significant rise in the National Minimum Wage.
EMPLOYERS TO PAY MORE IN NATIONAL INSURANCE
The biggest revenue-raiser was a big increase in employer National Insurance contributions, both through an increase in the rate and a sharp reduction in the earnings threshold at which employers start paying.
The cut in the point at which employer NICs are paid means the largest percentage rise in labour costs is for employing lower-wage workers. The rise in employer NICs will further increase the incentive for employers to switch to contracting with the self-employed.
Small to medium-sized businesses, SMEs, have only two options to deal with the increase in NICs and the minimum wage rise: increased prices to customers and lower wages for their staff. The dual impact of that is a projected decrease in household expenditure.
Against those factors, the increase in the employment allowance – and expansion of eligibility for it -will reduce the rise’s impact. The employment allowance is a government scheme that permits eligible employers to reduce their annual National Insurance (NI) liability by up to £10,500, essentially allowing them to pay less in employer’s Class 1 NI contributions each time they run payroll until the allowance is used up or the tax year ends. As most businesses are SMEs, the increase in their employment allowance disproportionately favours them.
BUDGET PRIORITISES “EVERYDAY ENTREPRENEURS”
Policy Chair of the Federation of Small Businesses (FSB), Tina McKenzie, said: “Against a challenging backdrop, today’s Budget shows a clear direction in business policy now for the whole of this Parliament to target support at small businesses, rather than big corporates – prioritising everyday entrepreneurs working in local communities in all parts of the country.”
Ms McKenzie added: “Increasing the employment allowance for small businesses by a record amount is a very welcome move, and we’re pleased the Chancellor has heard us loud and clear. More than doubling it, from £5,000 to £10,500, will shield the smallest employers from the jobs tax; therefore, it is a pro-jobs prioritisation in a tough budget.
“The decision to protect small businesses from an inflationary hike in business rates – by freezing the small business multiplier – will help small firms with premises across all sectors. Meanwhile, extending business rate relief, albeit at a lower level, for small firms in retail, hospitality, and leisure will mitigate a potential cliff-edge tax hike for those in some of the toughest sectors.”
CHAMBERS OF COMMERCE CAUTIOUSLY OPTIMISTIC
Gus Williams, interim CEO at Chambers Wales South East, South West and Mid, said: “This was always going to be a difficult budget. The headlines are going to be the £40bn increase in taxes. That was inevitable given pressures caused by demographics – an ageing population – increasing numbers of people not participating in the workforce, and the need for long-term public investment.”
Mr Williams continued: “The approach has been to try and spread the additional tax burden as widely as possible without touching income tax or VAT, focusing on those taxes that provide most certainty that the rises will increase the tax take in the short term. This means changes to the Employer’s NI, inheritance tax, agricultural and business disposal relief, Capital Gains Tax, second home stamp duty, abolition of the non-dom regime, air passenger duty, tax on vapes, and VAT on private schools.
“Changes to Employer NI, just increasing the rate to 15% and reducing the threshold from £9,000 to £5,000 rather than including pension contributions means a slightly lower rise in Employers NI than had been flagged, and makes sense as it retains the pension contribution incentive. However, it will be a burden to businesses, particularly in some sectors where wages are at the lower end, and staffing costs are a high proportion of overall costs.
“Freezes on small business rates and reductions for the hospitality and leisure sectors are something the Chambers of Commerce lobbied hard for and are welcome. The infrastructure investment plans appear sensible, well thought out and achievable rather than just aspirational.
“Changes to inheritance tax for agricultural and business property will impact succession and tax planning for a number of small business owners, and all small business owners must make sure they have a succession or exit plan in place.”
“The sleight of hand in all this is that a lot was made of personal allowances increasing in 2028; it’s currently 2024. The freeze in personal allowances until 2028, combined with the national minimum wage increases, will push more tax revenues into the Treasury, and this is probably where a significant chunk of the additional tax taken throughout this parliament will actually come from.”
THINGS STILL TOUGH FOR HOSPITALITY
David Chapman, Executive Director of UKHospitality Cymru, said: “We’ve campaigned long and hard for support with Business Rates, and so the provision of 40% relief for businesses in England from April is very welcome.
“However, it’s vitally important that the Welsh Government utilises this funding to provide businesses with a suitable level of continued rates support here.”
Mr Chapman added, “The Welsh Government should be applauded for introducing a lower business rates multiplier through recent legislation. While we discuss a new, better system, it would be incredibly beneficial to the sector to have all of this interim relief made available to us.
“Looking at where we are at the moment, things are still tough for our businesses.
“We are likely to face some post-Christmas closures and certainly staff and offer cutbacks because of cost increases in other areas, such as the new employer National Insurance Contributions and higher-than-expected wage rises, so the rate relief assistance is very important indeed.”
RETAILERS SOUND A WARNING
Trade groups are already counting the cost of the rises in National Insurance Contributions and the minimum wage.
The Association of Convenience Stores predicts an extra £600m in costs for its members next year, while the Federation of Wholesale Distributors estimates wholesalers will have to find another £110m.
“At a time we should be incentivising businesses to turbocharge economic growth across the economy, almost a quarter of our members may now be forced to reduce investment in other critical areas of their business,” says James Bielby, CEO of FWD.
Helen Dickinson, Chief Executive of the British Retail Consortium, said: “Retailers are counting the cost of today’s Budget: over £2.3bn in increases to employer National Insurance contributions; £367m due to the larger-than-expected rise to the National Living Wage; and a £140m hike to next April’s business rates. These costs come into effect in April of next year. They are on top of other upcoming regulatory costs and an estimated £300-800m of extra costs from the implementation of the Employment Rights Bill.
“Retail employs three million people and 2.7 million more across supply chains, driving investment in jobs, communities and, ultimately, economic growth, right across the country. For a low-margin industry, today’s Budget will hit hard, with the odds now stacked firmly against growth and investment in the short term. These new costs also risk increasing the prices customers pay at the till.”