Businesses are bracing for “short-term challenges” due to what has been described as a “strict budget,” which includes a staggering £25 billion impact from increased employment taxes, according to major UK lobby groups and industry leaders.
As Labour presented its first budget in 14 years, Chancellor Rachel Reeves indicated that the government is “asking businesses to contribute more” by raising the employers’ national insurance rate by 1.2 percentage points to 15% starting in April, further compounding previous tax burdens on the private sector.
The administration has committed to collaborating closely with business executives to stimulate investment that can revitalize sluggish economic growth, enhance public services, improve infrastructure, and uplift living standards.
“We need to stimulate growth, foster entrepreneurship, and encourage wealth creation while securing the revenue necessary to fund our public services and restore our fiscal health,” Reeves stated in the House of Commons.
Recent indications of problematic fiscal adjustments facing businesses and investors, including potential increases in capital gains tax, coupled with dire warnings from senior ministers, have adversely impacted business confidence.
The unexpected severity of the national insurance rate hike has left many business leaders remarking that it is a “difficult budget for the business community to accept.”
Shevaun Haviland, the director-general of the British Chambers of Commerce, noted that the rise in national insurance, alongside a 6.7% increase in the national living wage, will make it increasingly difficult for many firms to invest and recruit in the near term.
However, Haviland echoed the sentiments of other prominent business leaders, suggesting that the chancellor has attempted to balance the “upfront burden” on companies with a “long-term plan to ensure economic stability.” This includes strategies to boost infrastructure spending, sector-specific business rate relief, additional support for small enterprises, a corporation tax framework, full expensing initiatives, and a permanent annual investment allowance while maintaining R&D tax relief.
Rain Newton-Smith, chief executive of the CBI, which represents some of the largest employers in the UK, including AstraZeneca, Unilever, and GSK, also characterized the budget as a “challenging environment for business.”
She pointed out that while the corporation tax roadmap, which caps the tax rate at 25% for the current parliament, provides much-needed stability, the rise in national insurance, combined with other increases in employer costs, will burden businesses and hinder investment capacity, as well as making it more costly to employ new staff or increase salaries.
Roger Barker, director of policy at the Institute of Directors, remarked that there appears to be little within the government’s inaugural budget that offers anything more than short-term challenges for the business sector and cautioned that this could negatively affect business confidence, potentially jeopardizing the economy’s future growth prospects.
Nonetheless, Barker added that Reeves’ adjustment of the government’s fiscal regulations to allow for increased investment borrowing, as well as the launch of a new National Wealth Fund targeting future industries, could positively impact long-term economic growth.
Industry leaders and investors have been keenly anticipating the budget since Labour’s election victory in July.
Prior to the budget announcement, Dame Emma Walmsley, chief executive of GSK, emphasized the importance of maintaining a competitive fiscal climate.
Post-budget, Andy Briggs, CEO of Phoenix Group, the UK’s largest long-term savings and retirement corporation, stated that the changes to fiscal guidelines “make economic sense if implemented properly.”
Steve Hare, the CEO of Sage Group, noted that the budget presents considerable challenges for UK businesses, particularly smaller and mid-sized firms. However, many businesses may appreciate the assurance and clarity for the long term, enabling effective planning and adaptation.
To alleviate the impact of rising employers’ national insurance on smaller businesses, Reeves announced an increase in the employment allowance from £5,000 to £10,500. As a result, 865,000 employers will not incur any national insurance costs next year, and over one million will maintain or reduce their previous payments.
Tina McKenzie, policy chair of the Federation of Small Businesses, expressed her gratitude for the record increase in the allowance for small enterprises, acknowledging that the chancellor has indeed heeded their concerns.