The UK tax landscape continues to shift, with recent announcements from Chancellor Rachel Reeves bringing significant changes that will impact small Companies and unincorporated businesses. These updates, intended to balance growth and fiscal responsibility, include notable adjustments to National Insurance Contributions (NICs), business rates,and other key areas. This blog incorporates these changes, highlighting their effects on small businesses and summarizing their overall tax position following the proposed updates.
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Increase in Employer National Insurance (NIC) Rates and Reduction in the NIC Threshold
What’s Changed?
Rachel Reeves announced:
- An increase in Employer NIC rates from 13.8% to 15% on earnings above the threshold.
- A reduction in the Employer NIC threshold from £9,100 to £6,000 per employee.
How Does This Affect Small Businesses?
The increase in NIC rates and reduction in the threshold mean employers will pay more NICs on a greater
portion of their employees’ earnings. This significantly impacts payroll costs, especially for small
businesses with limited budgets.Example Impact
Let’s consider a small business with 10 employees, each earning £25,000 per year:
Old Rules:
- Employer NIC is payable on earnings above £9,100.
- NIC per employee: (£25,000 – £9,100) × 13.8% = £2,192.20
- For 10 employees: £21,922
New Rules:
- Employer NIC is payable on earnings above £6,000 at the new rate of 15%.
- NIC per employee: (£25,000 – £6,000) × 15% = £2,850
- For 10 employees: £28,500
Annual increase in NIC Costs: £6,578 or £658 for each employee
This additional cost could limit hiring plans or reduce funds available for other investments, especially for small businesses already struggling with tight margins.
Mitigation Strategy
- Employment Allowance: Businesses eligible for the £5,000 Employment Allowance (businesses
with employer NIC bills of £100,000 or less in the previous tax year) can offset a portion of this
additional cost, reducing their overall NIC bill.
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Changes to Inheritance Tax (IHT) Rules
What’s Changed?
The new IHT rules announced by Rachel Reeves remove key exemptions for family businesses and introduced a 20% tax on assets over £1 million. Previously, family-run businesses benefited from Business Property Relief (BPR), which significantly reduced or eliminated IHT liabilities.
How Does This Affect Small Businesses?
Family businesses planning to pass on assets will now face higher tax bills. This may force some companies to liquidate assets to cover the tax, potentially threatening their operations.
Example:
A family business with assets valued at £2 million previously paid no IHT due to BPR. Under the new rules:
- Taxable portion: £2,000,000 – £1,000,000 = £1,000,000
- Tax due at 20%: £200,000
This £200,000 liability could severely impact the business’s financial position, especially if liquidity is low.
Actionable Advice: Family businesses should consult tax advisors to explore strategies such as trusts or restructuring ownership to mitigate IHT exposure.
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Permanent Reduction in Business Rates for Retail, Hospitality, and Leisure Sectors
What’s Changed?
Eligible businesses in these sectors now receive a permanent 40% discount on business rates, capped at £110,000 per business annually.
How Does This Affect Small Businesses?
This measure provides much-needed relief to high-street shops, restaurants, and leisure operators struggling with rising costs.
Example
A café with an annual business rates bill of £25,000 will now pay:
- £25,000 × 60% = £15,000
- This £10,000 reduction could be reinvested in the business by upgrading equipment, marketing, or hiring staff.
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Stability in Corporation Tax Rates
What’s Changed?
Corporation Tax rates remain at 19% for businesses with profits below £50,000. In comparison, profits above £250,000 are taxed at 25%, with a tapered rate for profits between £50,000 and £250,000.
How Does This Affect Small Businesses?
The decision to maintain current Corporation Tax rates provides stability for small businesses, allowing for predictable financial planning. Small businesses with lower profits will continue to benefit from the 19% rate, leaving their tax liabilities unchanged.
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Energy Bills Support
What’s Changed?
The Energy Bills Discount Scheme (EBDS) remains in place, providing discounts on energy costs for eligible businesses, including small enterprises.
How Does This Affect Small Businesses?
Though less generous than previous support schemes, the EBDS helps businesses manage high energy costs. Small businesses should explore energy-efficient technologies to reduce costs further and take advantage of any available green tax incentives.
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Overall Tax Position for Small Businesses After Rachel Reeves’ Changes
Summary of Key Changes:
- Employer NICs: Increased rate (15%) and lower threshold (£6,000), raising payroll costs.
- Inheritance Tax (IHT): New 20% tax on assets over £1 million for family businesses, removing exemptions.
- Business Rates: Permanent 40% reduction for retail, hospitality, and leisure sectors.
- Corporation Tax: Stability in rates, with no changes for small businesses with profits below
£50,000.
Net Impact on Small Businesses:
Increased Costs
- Higher Employer NICs will strain payroll budgets, particularly for businesses with multiple employees.
- The loss of IHT exemptions for family businesses could create significant financial burdens.
Relief Measures
- Businesses in retail, hospitality, and leisure sectors benefit from reduced rates, offsetting some financial pressures.
- Stability in Corporation Tax rates allows small businesses to plan confidently.
Examples of Net Impact
- A small retail shop with 5 employees earning £25,000 each will face higher NIC costs (an additional £3,289 annually) but will save significantly on business rates (e.g., £10,000 annually).
- A family business planning succession will face new IHT costs, such as £200,000 on £2 million in assets, forcing a reassessment of their financial strategy.
Conclusion
The tax changes Rachel Reeves announced introduce challenges and opportunities for small businesses in the UK. While increased NIC rates and the reduction in the NIC threshold will raise costs for most employers, relief measures like reduced business rates and stable Corporation Tax rates provide some stability.
To navigate this complex tax environment, small business owners should:
- Consult Experts: Work with accountants or tax advisors to develop tailored strategies.
- Leverage Reliefs: Ensure they take advantage of Employment Allowance, business rate reliefs, and other support measures.
- Plan Proactively: Adjust hiring plans, compensation structures, and succession strategies to minimize tax liabilities.
By staying informed and planning, small businesses can adapt to these changes and maintain resilience in an evolving economic landscape.