Austerity rollback – great
Fabric of society being invested in – excellent
Greater burden on SME business owners – why?
Hinder SME’s recruitment – don’t quite believe the headlines!
Our first ever female chancellor of the Exchequer, Rachel Reeves, delivered the first Labour UK budget in more than 14 years.
An historic day on many fronts, and it was a hotly anticipated budget too with a good few leaks and early notifications having been given. We waited with bated breath for the specifics, as did much of the small and medium-sized business community.
How bad would it be?
Are SME business owners really being called non-working people?
Would there be any support for growth?
The biggest headline affecting SMEs in the UK budget was around the increase in Employers National Insurance contributions. We’ve already heard from a number of owners that it will stall or stop them recruiting.
As headline-grabbing and panic-inducing this may be, it won’t actually be the reality for many SMEs…
If you are an SME – don’t stop your recruitment plans just yet!
Let’s run the numbers on this from this autumn’s UK budget, and assess the reality for most SME business owners.
The three announcements to consider here are:
- The level at which employers start paying National Insurance per employee has dropped from £9,100 to £5,000
- The rate of Employer National Insurance Contribution has increased from 13.8% to 15%
- An increase in Employment Allowance (how much employers get off their National Insurance costs) from £5,000 to £10,500.
| Previous Arrangement | New UK Budget Arrangement | |
|---|---|---|
|
How much of per employee’s salary you pay NI on |
£30,000 – £9,100 = £20,900 |
£30,000 – £5,000 = £25,000 |
|
NI contribution per employee |
£20,900 x 13.8% = £2,884.20 |
£25,000 x 15% = £3,750 (+30%) |
|
NI for 5 employees |
£2,884.20 x 5 = £14,421 |
£3,750 x 5 = £18,750 |
|
Employment Allowance offset |
£14,421 – £5,000 = £9,421 |
£18,750 – £10,500 = £8,250 |
What this means is that for small businesses with just a few employees, your costs could well be coming down!
There were 5.6 million SMEs in the UK in October 2023, of which 90% of them had four or less employees. Therefore, by our rough calculations, approximately 90% of SMEs in the UK could benefit from these changes and pay less Employer National Insurance than they do currently!
The difference though comes when you get a little bit bigger…
Scenario B: 10 employees on £30,000 per annum
| Previous Arrangement | New UK Budget Arrangement | |
|---|---|---|
|
How much of per employee’s salary you pay NI on |
£30,000 – £9,100 = £20,900 |
£30,000 – £5,000 = £25,000 |
|
NI contribution per employee |
£20,900 x 13.8% = £2,884.20 |
£25,000 x 15% = £3,750 (+30%) |
|
NI for 10 employees |
£2,884.20 x 10 = £28,842 |
£3,750 x 10 = £37,000 |
|
Employment Allowance offset |
£28,842 – £5,000 = £23,842 |
£37,000 – £10,500 = £27,000 (+13%) |
You just need to get a few employees further on and you start to see the NI liability increase. The Employment Allowance does help mitigate the impact of the 30% increase in NI contribution per employee so employers only have a 13% increase instead (in this scenario).
Although not a small increase it is a number that could be managed with a few good business strategies to maximise profit, productivity and reduce other costs.
Obviously recruiting additional members for your team should bring more revenue and profit, not just cost, so you’d certainly hope that more than a 13% increase in your business would be possible with extra members to your team. But of course, that extra £3,158 will come straight off your bottom line and profit.
In short, the increase in NI for employers isn’t necessarily a barrier to recruitment in our opinion.
We should note, we are not accountants or financial experts. We’ve conducted a straight calculation using the Budget news and there will be nuances, other policies, schemes that could well affect your specific situation so always seek professional advice as to how you are affected.
Where this will stifle growth
For many SMEs, they have the potential to benefit from this. If you are on the smaller side already, recruiting another couple of employees could well fuel growth and not significantly increase your tax bill. It is those getting towards the middle-sized business and above that are going to feel this change the most.
In our opinion this will likely mean a few things will happen:
- The panic of the increase could well stop recruitment and therefore, ultimately, growth even from those you aren’t negatively affected by the changes. SO please run the numbers for your business situation – you don’t want to risk the fear of increased costs holding back your ambitions!
- There will be a hesitation in reviewing or increasing wages and salaries as there will be nervousness and uncertainty around the additional (if any) NI liability. Therefore, despite the Government’s claims, ‘working people’ will still be affected by these changes in a roundabout way.
- Probably a reduced willingness to take on junior members of the team or apprentices. It always takes longer to see a return on investment from juniors or apprenticeships because of the training required to bring them up to speed. With the net gain of recruitment less due to a higher NI bill, these could be the employees who see their recruitment opportunities diminish the most. Couple this with the increase in National Living Wage and the National Minimum Wage and there could well be quite a big uplift in costs for the most junior members of your team.
- Those businesses who work to low margins will feel the pressure to generate extra revenue to generate more return to cover any increase in employment costs.
What business owners are most likely to do
Given this uncertainty, certainly higher costs and liabilities in some areas, and probably a lack of sitting down and running the numbers for themselves, business owners will probably manage with what they’ve got for longer. Whether that be keeping wages as they are currently (or inflation increases only) or not recruiting for that new role until absolutely necessary.
The net result of this, is that many SMEs are unlikely to seek expansion through creating new job opportunities.
The few ‘wins’ that were presented in the UK’s budget, we’d argue were not. For example, keeping the income tax thresholds static until 2028 is just a non-reversal of a painful non-inflation tracking situation.
In addition, it’s only recent that Corporation Tax rates were substantially increased for businesses. This has not been offset in any meaningful way, and the impact is still at play, before these NI changes.
Working versus non-working person definition
It fails to recognise or reward entrepreneurship and the fact many business owners are not millionaires, reaping in large salaries. Rather there are over 5 million businesses who have less than 4 employees working in them – there is not a chance these businesses can be functioning without a fully committed, fully involved business owner who is probably working more hours than the standard employee!
Employers are not in the business pf employment. The aim of a company is not to employee people, rather to enable them to have the resources to deliver on their purpose and generate profit. The attitude and tone of the UK budget this autumn does not reflect the reality for business owners in the SME sector nor their contribution (or greater potential contribution) to society.
Our conclusion on Labour’s UK Budget for 2024
It is fantastic news that austerity measures are being rolled back and that the fabric of our society – from education, health and public services – are being invested in. The money for that must come from somewhere. In our view it should be being shared more fairly across society.
If you are small business, we’d implore you to run the numbers for your business as you might not be seeing an NI liability increase or perhaps just a very small one, which could give you a clearer pathway for growth than you think.
Even if your NI liability is increasing, there are numerous approaches, techniques and strategies you can use to increase the flow of profit in your business, from marketing, sales, operations, systemisation, cost management, financial controls, team performance management and more.
There is lots of free advice on our blog to help, free downloadable guides, or you can attend one of our forthcoming educational seminars to find out how you can do this in your business.
You don’t have to just suck the situation – you can do things differently to mitigate the impact of this and we are here to help the SME community do that.
