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Should businesses hunker down or invest their way out of the cost maelstrom?

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Before the Chancellor’s speech, the Institute of Directors dubbed the leaked and predicted Budget measures a ‘perfect storm’ for business. How does reality compare to those fears?

We asked Nick Hood, Senior Adviser at the Opus Advisory Group to look at the Budget from a business and financial risk viewpoint.

“It’s worth starting with a summary of the major business-related decisions announced in the Budget:

National insurance (NI)
• A 1.2% rise in the rate paid by employers, taking the figure to 15%.
• The threshold at which they start paying these contributions from £9,100 to £5,000.
• The extra amount raised for the Exchequer is estimated to be £25billion, a gross figure before any consequential negatives on Corporation Tax receipts or benefit payments.
• As a concession to small 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.

National minimum wage (NMW)
From April 2025:
• It rises 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 £1.9 billion to the industry’s wage bill.

Less well publicised is the ripple effect of these increases as those higher up the pay scale press for differentials to be protected.

Business rates
• Reliefs due to expire in March 2025 extended.
• Discount cut from 75% to 40%.
• Without the continuation of the current reliefs, 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.

The actual changes were:
• Top rate rising from 20% to 24% for higher rate taxpayers.
• Lower rate for standard rate taxpayers rises from 10% to 18%.
• BADR lifetime limit of £1 million remains unchanged.

Other tax changes
Individual sectors face higher taxes from other measures announced, notably the oil and gas industry windfall tax and private equity investors with CGT on carried interest.

How will business react?
The question is what employers will do in the face of an extra tax burden of increased NI, the higher NMW and doubled Business Rates, all of which will go straight to their bottom lines unless they take steps to alleviate it.  Their options are simple: raise prices, cut pay or cut staff, or a mix of any two or all three.  The first will be difficult for those companies operating in price sensitive markets.  The second is tricky in practical terms, except for new joiners. The third threatens their ability to operate efficiently or effectively.

The Employment Rights Bill
Underlying all of this is the draft legislation introduced to Parliament on 10 October 2024.  This will certainly improve workers’ rights but will be bound to have cost and operational implications quite apart from its potential effect on business confidence as regards hiring intentions.

Could there be a surge of insolvencies post-Budget?
Business failures in the most heavily impacted sectors (hospitality, retail and entertainment) are almost a quarter of all corporate insolvencies.  The total for the twelve months ended August 2024 for England & Wales was 5,845 out of 25,126.

After the Budget measures and other announcements, it is difficult to imagine that failures in these vital industries won’t rise substantially as the extra cost burdens bite into profitability, suck out liquidity and threaten viability.  Most at risk as always will be smaller businesses, which lack the financial reserves and resources to withstand the extra financial burdens they now face.

Will private sector business investment be impacted?
Economists agree that the UK’s business investment record has been poor for decades.  Opus examined this issue in detail in a blog late last year.

The government’s central economic policy apart from ‘fixing the foundations’ has been that achieving significant and consistent growth is its greatest priority.  This will only come from substantial investment to boost productivity.

In the run up to the Budget, there have been many stories of expansion plans being put on hold.  Now businesses must deal with the £25 billion 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.  It remains to be seen how enthusiastically they will support the government’s objectives against this background.”