New financial year, new challenges
With the Chancellor giving a financial update on the country’s finances in the Spring Statement on Wednesday March 26th – there are also several other tax and financial changes coming that business owners and directors need to be aware of when they come into law in April.
One of the most impactful changes coming after April 6th 2025 will be the increase in employer National Insurance Contribution (NIC) rates which was first announced in the Autumn Budget in October.
The rate of secondary NICs, paid by employers on an employee’s earnings above the secondary threshold, will rise from 13.8% to 15%.
At the same time, the secondary threshold – the point at which employer NICs become payable – will be reduced from £9,100 to £5,000 per year.
As a result, it’s estimated that 940,000 employers will see an increase in their NIC liabilities in the 2025/26 tax year.
To offset the impact of rising NIC costs on smaller employers, the NIC employment allowance will increase from £5,000 to £10,500. Previously the allowance was only available to businesses with a prior tax year NIC liability of £100,000 or less but this restriction will be removed.
However, some restrictions still apply. For instance, businesses where only one person is paid above the secondary threshold, and that person is a director, will not be eligible for the allowance.
There will also be increases to the minimum wage; statutory sick pay and immediate rises to the Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR).
What options does the Chancellor have?
Against a backdrop of these increasing costs for businesses, a decline in consumer spending and confidence and a cut in small business relief rates for firms in the retail, hospitality and leisure sectors – the Chancellor’s room for manoeuvre is small and appears to be shrinking.
She will also do so after new forecasts are published from the Office for Budget Responsibility after the Bank of England reduced their forecasts for growth this year.
The growth figures combined with higher-than-expected borrowing will put pressure on the government to either increase taxes or cut spending in order to meet the financial rules introduced at the Budget.
With no changes to the tax regime expected, one tactic might be to prolong the freeze on income tax thresholds by another year or two. By not increasing thresholds in line with inflation, they would operate as a “fiscal drag” or hidden tax increase which would see tax revenues increase without any manifesto pledges being broken.
The Chancellor is also hobbled by self-imposed borrowing rules which mandate that day-to-day government spending be financed through revenue not borrowing. This is mainly due to the reaction of the bond market (a measure of how expensive interest is on government borrowing) which leapt under Liz Truss and Kwasi Kwarteng’s unfunded tax cut led budget which saw an immediate retrenchment.
The quick repercussions of upsetting this market is clear and not even a rapidly evolving international environment with extra funds are needed to finance vital sectors, notably defence will indicate any changes or movement.
In order to facilitate additional spending, the most likely route will be through spending cuts and reforms to the Welfare system.
No matter what announcements are made this week, the outlook for the rest of the year looks like it’s going to be a tough one.
But there is still time to make some important changes to make sure your business is in the best shape to weather the difficulties, no matter what shape they come in.
Get in touch to arrange a free initial consultation with one of our team and once they get a better idea of the goals you have for your business they’ll be able to let you know what options you have to reach them.