What does it mean for insolvency and business? - First thoughts on the Autumn budgetPosted: Oct 31, 2024

The Autumn budget wasn't exactly a friendly one for SMEs. Whether it will lead to more insolvencies and financial problems remains to be seen. For now, it needs a focused practical response.

An initial and practical response for businesses to the budget.

There is a lot to think about in the Autumn budget, and we will come back to some of the more intricate and specialised areas in a later blog. For now, and with the usual caveat that nobody has a crystal ball when it comes to the economy, here are our first thoughts. Much of what follows is based on general overview scenarios and you will need to apply the content to your own circumstances to create a specific response of course.

These are not thoughts or questions about whether it is or isn’t a betrayal of manifestos or what it means to the international markets or other academic or high-level discussion, but our thoughts and advice as Insolvency Practitioners on what this means to business finances. 

Let’s take a few key points that will almost certainly be of initial interest.

National Minimum Wage Increase: From April 2025, the minimum wage will rise to £12.21 for adults over 21, with additional increases for younger workers and a significant jump up in wages for apprentices. There is no dressing this up, it is going to be a financial hit for many businesses. In particular, the already hard-hit sectors such as retail, hospitality, manufacturing, care, and logistics are all going to see a significant impact.

What we are looking at in general terms is a lift in the cost of employment. That will need to be passed on or absorbed in some way.

As an example, let’s assume you are a manufacturer or logistics company employing 30 people on current minimum wage. Using a rounding process of 52-week year and 40-hour week, generally speaking, you would be looking at:

Current annual salary per employee £23,795 increasing to £25,396 means an annual increase of £1600 per worker.

Total annual increase in cost for wages to our representative 30 workforce employer, will likely be in the region of £48,000

There is no doubt that this will be very unwelcome news to many businesses. It either means increased cost to the consumer, or it will hit your profits. For most businesses, it will be a balancing choice between the two, but for those who are already squeezing their margins to remain competitive, it is going to be hard to find the money.

Increase in Employers’ National Insurance (NI): Employers will see a 1.2% rise in NI contributions in April 2025 to 15%. Although the employment allowance will change from £5,000 to £10,500.

Again, there is no getting around the fact that, despite the employment allowance change, this is a direct increase in costs for many employers. As a ballpark figure, someone on a fairly representative salary of £30,000 a year will now cost the employer around £360 a year more. While £360 may not initially seem a huge amount in the grand scheme of things, it’s important not to dismiss this too quickly. Many sectors employ large numbers of employees in the 30 – 35k bracket and many of these businesses are on fixed contract service with their customers and in competitive markets. 10 employees costing £360 - £400 a year more are likely to be a financial problem if that cost cannot be passed on.

Some of the concerns that business had pre-budget did not happen though, and that will raise a sigh, albeit a shallow sigh, of relief this week.

No Fuel Duty Increase: The fuel tax freeze will almost certainly be welcome news. The cost of shipping has been a concern for businesses for years now and many expected the duty to be increased in this budget. While there was clearly no promise this would continue in the future, for the short term, it should provide a little more stability when it comes to basic costs. Logistics, retail, and service sectors in particular will be pleased to see this stay the same. Sadly, we also need to remember that the cost of fuel is already a big factor in the financial problems faced by many businesses and while that pressure will not increase, it isn’t going to reduce either.

Full Expensing for Capital Investments Remained in Place: The full expensing measure allows businesses to deduct 100% of capital expenditure immediately, rather than spreading it over several years. On the surface, this sounds positive for expansion. However, there is a question here in whether the money to invest will be there in the first place. Capital investment is not the only factor in expansion and, of course, the other main costs can be increased employment to support the investment. As we have just seen, the cost of employment is rising quite significantly, and this may be particularly true in manufacturing, construction, and logistics which traditionally need to heavily invest in capital equipment.

So, while these are good news on the surface, if you are already struggling financially, they will need to be taken with a pinch of salt because in real terms they may already be a problem or out of reach of your current financial reach.

Finally, some news that will almost certainly be considered good by some sectors and businesses.

Business Rate Relief, Corporation tax and Green Investment: The good news was that the budget included expansions to rate relief programs for small businesses. To quote the Chancellor directly she said she would provide,

“…40% relief on business rates for the retail, hospitality and leisure industry in 2025-26 up to a cap of 110,000 pounds per business “

Although this is a reduction in the previous relief, many SMEs will at least continue to benefit from reduced business rates for an extended period. Small compensation perhaps, but something.

Corporation tax was capped at 25% so that will help with forecasting cash flow and give you a fixed point to work with when it comes to your tax spend.

There were also a series of support measures for energy-efficient and green technologies. This is again a benefit that could be negated by the need for investment capital, but businesses looking to reduce long-term energy costs could well benefit from a series of measures that will help them achieve their goals.

How to respond to the budget - some practical steps.

Looking at the budget in overview, it is a mixed bag of helpful initiatives such as the rate relief and some very worrying changes such as a significant cost increase for employment.

As an immediate response, we suggest the following 5 steps:

1. Review what the change to employment costs means to you as matter of urgency. These are measurable, clearly defined and you should already have them as part of your current cash flow and business forecasts. Hopefully that means you can easily incorporate the new levels into your forecasts and see the impact of the changes. This will probably be the most important change in your financial situation, so start here.
2. Look into the options presented by the more positive aspects of the budget. Is this an opportunity for capital investment and expansion or could you take advantage of the green energy opportunities?
3. Go back to your cashflow forecast and do some models considering the cost of NI and salary increases. Don’t forget to add in the small relief items such as the employer allowance. Also remember that your suppliers are going to see cost increases and they will probably need to pass that on to you. Play safe and avoid the optimism trap at this stage. Realism is your watchword.
4. Re-visit cost savings and spending because you need to and be brutally honest about what you can and can’t do to offset the cost of employment rise. Can you raise your prices or perhaps reduce costs to balance things out? If you can’t, could all this mean redundancies or downsizing or, does it mean something even more worrying?
5. Stand back and make an honest assessment about what it will mean to you. Know your numbers for the coming months because it is the only way to really assess your position.

Finally, if you are already concerned you may be heading for insolvency, and the budget has made things more difficult for you, contact us for an initial discussion. It certainly seems likely that for many businesses the rise in employment costs will mean they could struggle financially. We do expect a rise in insolvencies and if think you are heading that way, then there is nothing to be gained from eking out a few more weeks. The sooner you act, the sooner we can help you.

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