Earlier this year, when we asked industry executives for their thoughts on areas the new government should prioritise (read Labour intensive), increasing the tax burden on businesses – unsurprisingly – wasn’t one of them.
On 30 October, Chancellor Rachel Reeves delivered the first Labour budget in 14 years. The headline figure was an increase in spending by almost £70 billion a year over the next five years as – among other things – the government endeavours to make the country’s creaking public services fit for purpose.
While tax hikes in a budget are hardly anything new, just over half of the £70 billion – £36 million – is set to be funded by an increase in taxes on businesses. Most of this will come from higher employer National Insurance contributions (NICs), which will rise from 13.8% to 15% on 1 April 2025. At the same time, the threshold at which firms start paying NICs on an employee’s earnings will be lowered from £9,100 to £5,000.
The budget outlined a reduction in business rates relief for the retail, hospitality and leisure sectors. This will decrease from 75% to 40% in 2026, effectively increasing the tax liability on these industries by £2.7 billion over the next few years.
Other measures affecting employers include a 6.7% rise in the National Living Wage (NLW) for those over 21, also starting next April, with 18-20-year-olds getting an even bigger percentage increase.
Added pressures
Regarding the upcoming NLW revisions, BOSS Federation’s economic advisor Kyle Jardine noted: “The government will promote this as a pay boost for millions of workers, but there will be concerns from businesses about the extra costs and added pressure to maintain pay differentials throughout their entire employee pay structure.”
The Autumn Budget was widely panned by small business groups. Independent retailer association BIRA condemned it as “devasting” and “potentially catastrophic” for Britain’s high streets. The Federation of Small Businesses said many SMEs would “struggle” with the NIC and NLW changes and warned of “possible negative impacts on jobs, wages and prices”.
The CBI welcomed the intention to reform the business rates system and investments in infrastructure but indicated the NIC rise could impact growth, leading to reduced investment, hiring freezes, lower pay, price increases and jobs moving overseas.
Meanwhile, the Office for Budget Responsibility (OBR) forecast the announced measures could lead to a temporary upturn in the economy but warned of a potential slowdown in the medium term, as the additional tax pressure might dampen private sector investment and consumer spending.
Blunt instrument
A high-profile figure who backed Labour during the 2024 election campaign was Ryman owner and small business champion Theo Paphitis, who for many years was a staunch Conservative supporter.
He was reluctant to openly criticise the government, but – appearing on the BBC – called the budget a “tough one” for business and a “bitter pill to swallow”.
“We fully take on board that public services are on their knees and need to be paid for,” he said. “[However], I didn’t expect [the budget] to be such a blunt instrument straight onto business.”
He noted that company owners are “great at playing with the cards they are dealt” but highlighted the importance of reforms to drive an improving economy. “Governments create the environment for growth; taxing doesn’t create growth,” he stated, adding: “The big message is the OBR growth rates are clearly not enough on their own and we need to see reforms and initiatives from government that will [enable these rates to be much higher].”
He also warned: “We’re going to have to mitigate [the budget impact] in many ways and, unless we get growth following on from this, there are going to be repercussions.”
He wouldn’t be drawn into specifying what ‘repercussions’ could mean but, like other leaders, Paphitis might have to make some tough decisions in the coming months.
Viewpoint
UOE CEO and Postmaster Elliot Jacobs heads one of the UK’s leading independent workplace supplies and services companies, serving over 1.5 million customers. Below is his reaction to the Autumn Budget:
Entrepreneurs and small businesses are the true engines of a growth economy, driving innovation, creating jobs and stimulating local investment. Yet, rather than encouraging boldness and opportunity, this budget fosters retrenchment and uncertainty.
It undermines entrepreneurial spirit by forcing companies to focus on survival instead of expansion. For a government aiming to build a thriving economy, these measures risk stifling investment and, most importantly, confidence.
For many retail and hospitality operators, the added costs will exceed their annual profit, leaving them with few viable options: cut costs, reduce staff, or raise prices. None of these choices create the economic growth the Chancellor needs to deliver her ambitious goals.
Business rates remain a perennial issue across the country, widely acknowledged as a broken system in desperate need of reform. Successive governments have promised change, yet meaningful action remains elusive.
Instead, the reduction in retail and hospitality support from 75% to 40% in the recent budget effectively raises the cost of business rates by a staggering 140%. Combined with rising wages and increased National Insurance contributions, this places immense strain on firms already operating on razor-thin margins.
A fundamental overhaul of the business rates system and broader assistance for entrepreneurial risk-taking is urgently required to restore confidence and lay the foundations for sustainable economic success. In its desire to avoid directly taxing the general public, the government is pushing businesses to ‘tax’ their customers with higher prices instead.
