Budget 2024 review: A bitter pill for SMEs?

In her first Budget, and the first Labour Budget in 14 years, Chancellor Rachel Reeves unveiled a series of tax hikes, primarily targeting employers and wealthier individuals. The Office for Budget Responsibility’s stark warning about the nation’s long-term fiscal challenges set the scene for the Chancellor to announce a series of measures to boost the government’s tax revenue.

How does the Budget impact SMEs?

Several announcements will directly impact SMEs, here are the headlines:

• Employer’s National Insurance (NI): One of the biggest changes the Chancellor announced is that Employer’s NI will increase from the current rate of 13.5% to 15% from April next year. The threshold at which businesses start paying Employer’s NI on workers’ earnings will also be reduced from £9,100 to £5,000. There will however be an increase in the employment allowance from £5,000 to £10,500, alongside greater accessibility for qualifying employers.
• National Living Wage: The National Living Wage will increase by 6.14% to £12.21 an hour for workers over 21 years old. Increases for those aged 18-20 and apprentices were also announced.
• Business Rates: While a 40% business rate relief was announced for some sectors (retail, hospitality, and leisure), the small business multiplier will be frozen at 49.9p for the next 12 months.
• Capital Gains Tax (CGT): The lower tax rate has increased from 10% to 18%, whilst the higher rate saw a 4% rise from 20% to 24%. These increases were effective immediately on 30 October 2024. However, the Chancellor chose to keep Business Asset Disposal Relief (BADR), albeit with lower rates of relief from April 2026.
• Inheritance Tax: Changes to Business Property Relief and Agricultural Property Relief were announced. From April 2026, qualifying farms and businesses valued over the £1m will potentially be subject to an inheritance tax liability, whereas until this date they would have been fully relieved.

In practical terms, what does all this mean for the UK’s business community?

• Increased labour costs: The rise in Employer’s NI contributions and the reduction in the threshold could significantly increase the cost of employing staff because employers may pay more NI on their employees’ wages. This could lead to job cuts, wage freezes, or these costs could be passed onto consumers through price hikes.
• Squeezed profit margins: Without any actions mentioned above and if employer’s opt to absorb the increased employment tax and costs, profit margins could be impacted which could limit their ability to invest in growth, innovation, and employee development.
• Reduced investment appetite: The increased tax on CGT and the reduced incentives for investment relief could reduce the incentive for entrepreneurs to take the risk of starting or continuing to run a business, resulting in a loss of job opportunities.
• Succession planning: The ability for established family businesses to be passed down to future generations is likely to be limited as a result of the reduced inheritance tax reliefs, meaning some businesses may need to be sold in full or part, or financing arrangements sought by beneficiaries, simply to pay the inheritance tax liability.

The road ahead

The Chancellor’s budget has undoubtedly painted a challenging picture for SMEs. As businesses grapple with rising costs and increased tax burdens, what can SMEs do to mitigate the impact of these measures? Here are some strategies they may want to consider:

• Cost reduction: Implementing cost-saving measures, such as streamlining operations and negotiating with suppliers.
• Price optimisation: Carefully considering pricing to maintain profitability.
• Digital transformation: Investing in technology to improve efficiency and productivity in the long-term.
• Seeking professional advice: Consulting with tax advisors to optimise planning and compliance opportunities.

Whilst the long-term implications of these tax changes remain to be seen, it’s clear that SMEs will need to adapt and innovate to navigate the challenging economic landscape.

Find out more about the Autumn Budget 2024.