SMEs carrying the burden of Autumn Budget

Anyone tempted to play budget bingo last week may have been primed to count the number of times the Chancellor was going to use the phrases ‘fixing the foundations’ and ‘growth’.  Whilst much of what was announced had been flagged in the preceding weeks, what was surprising was just how much of the burden for fixing those foundations will fall on the UK’s SMEs, the very same group which will be charged with delivering the growth on which the economic plan is based.

The changes to Employer’s NIC announced yesterday, effective from 6 April 2025, had, to a degree, been trialled in the days before the budget, and so their inclusion was not totally surprising.  Having limited its options for raising tax through its Manifesto commitments, the Government appears to have left itself few tools to really move the dial in terms of tax take.  Having tested opinions, and discounted various options in the weeks leading to yesterday, it seems that increasing Employer’s NIC by over a percentage point was seen as an ‘easy’ way to move that dial without being accused of reneging on that Manifesto.

The impact of this change on employers, particularly those with large numbers of lower-paid staff will be significant, however.  The additional NIC cost will be £615 per staff member on their first £9,100 of salary.  Businesses with a small number of employees will benefit from the increased Employment Allowance, but those SMEs with bigger headcounts face an almost certain increase in their payroll costs. What impact this will have on growth and on ‘working people’ would seem unclear at the moment.   But one can see businesses in the retail and hospitality sector, for example, facing some tough choices as a result of this.

The issue for employers is further exacerbated by the announced increases in the National Living Wage (NLW).  Recent years have seen a series of increases in the NLW and what is clear is that this impacts not just the salary cost of the lowest-paid staff but also filters up to staff pay throughout the organisation.

With pension tax relief and salary sacrifice untouched by the budget, opportunities do still exist for the entrepreneur to both minimise payroll cost to staff and to maximise tax-efficient profit extraction.  Any business with a sizeable headcount, not currently running a salary sacrifice scheme, would do well to consider one now, for example.

Business clients will be thankful that there were no significant changes to other key areas of business taxation.  Specifically, it was reassuring to hear that the incentives for capital investment – the Annual Investment Allowance and Full Expensing – will be retained, and after a period of much change, it was good to see the Research and Development regime remaining untouched.

Much of the speculation ahead of the budget concerned the capital taxes – Capital Gains Tax and Inheritance Tax (IHT) – with predictions that CGT rates might move in line with Income Tax rates.

In the end, CGT changes were at the lower end of the scale.  The death of Business Asset Disposal Relief has been foretold ahead of many a Budget, but it remains to fight another day.  The rate at which gains will be taxed will, though, rise to 14% from April 2026 and 18% from April 2027 reducing further the overall benefit of this relief to the entrepreneur for his or her toil often over many risk-taking.  Whether the value of this relief is enough to see business owners wanting to accelerate business sales ahead of these rate increases, we will wait to see.

The changes to Inheritance Tax are likely to have a far bigger impact on SME business owners and their family wealth, however.

Many of our clients run multi-generational family businesses who will have been working on family succession plans based on existing rules, with the expectation that their business assets would be covered in full by Agricultural Property Relief (APR) and/or Business Property Relief (BPR).

From 6 April 2026, APR and BPR will be subject to a combined limit of £1m with a value above that subject to just a 50% relief.  Larger farms and businesses will be subject to an effective IHT rate of 20% on value above £1m.

The impact of this on the farming sector in particular cannot be underestimated and we would anticipate significant lobbying from across the industry on this matter, challenging these changes, including the quantum of the £1m limit proposed.

Many clients will also have significant pension pots which currently sit outside their estates for IHT purposes.  From April 2027, pension assets will no longer be exempt.

IHT is often a manageable tax, but careful work will need to be carried out to ensure that farms and other businesses are passed down generations in as tax-effective way as possible.  This may involve restructuring and perhaps the bringing forward of changes in ownership, alongside the revisiting of Wills.

In summary, it does feel, once again, that SMEs and their owners are being expected to carry an unduly high burden for fixing the UK’s issues.  The key thing for business owners is to stay close to your advisers, to ensure you maximise the reliefs available and to ensure that you do take time to revisit and adapt your long-term plans as a result of these changes.

If you would like to discuss fthe Budget in more detail, then please do get in touch.