Robber Rachel - Depressing news for small business in Rachel's first budget

Doom merchant Kier and his depressing band of robber's have delivered their long awaited depressing, painful and negative budget.  

Months of negative speculation (and leaks)  about what pain awaited us in Rachel's chamber of torture have already inflicted damage on the economy. 

ABRDN have reported £3.1 BILLION in capital flight from their pensions in the run up to the budget torture show. This is just one pension company - the aggregate number is likely to be in the high tens or even hundreds of BILLIONS. Savvy investors (pensioners) have decided to seek safe harbour for their hard earned pension away from these highway robbers. I've done this myself as I still spit feathers over former Chancellor Gordon Brown stealing £60k from my pension as a "windfall tax" and the only trust I have in Labour is they will try to do the same again. 

Thankfully the worst of the leaks turned out to not be true.  On the whole the budget wasnt as bad as it could have been. 

However it's clear that Kier thinks SMALL businesses have the BROADEST SHOULDERS.  A big increase to the minimum wage and a 1.2% hike in national insurance and lowering of the threshold.  Big tech like Amazon will barely notice this increase and have been given £1.5BILLION in tax breaks for automation to reduce the need for people. No such luxury for small businesses.

As I previously speculated - Labour would target businesses because they are not people.  So let's look at the impact on small business.

Someone working 40 hours per week on minimum wage currently earns £11.44 per hour.  Rachel has increased this to £12.12 (an inflation busting 6.7%).

So currently annual earnings are £23,795 per year which will increase to £25,209.  The employer therefore has to find an additional £1,414.

However it doesn't stop there.  Employers have to pay 3% pension contributions.  Currently that equates to £714 per year but because it's a percentage the pension contributions increase to £756 as a direct result.  The employer needs to find another £42 per year.

Rachel also increased EMPLOYER national insurance by 1.2% from 13.8% to 15%. This is a tax on employment. The threshold at which employers have to start paying employer national insurance is £9,100 so currently employers have to pay 13.8% TAX on £14,695 on the employee earnings which equates to £2,027.94 per year.  However the threshold has been reduced to £5,000 and the rate increased to 15% hence  Rachel's tax increase means that the employer now needs to pay £3,031- an increase of £1,003.  

This is not claw back of the national insurance cuts by Jeremy Hunt - those were EMPLOYEE cuts so the EMPLOYEE has kept them. 

So Rachel has increased EMPLOYER costs by £2,460 (10.3%) per a single employee on minimum wage.

So what options do employers have who are running on razor thin margins (eg carers) ?  

1/ Increase prices to compensate - that's inflationary. 

2/ Swallow the costs - that means margin will be reduced and hence the business may be unprofitable

3/ Sack employees to reduce costs

4/ Only employ people under the age of 21 as there's no EMPLOYER national insurance contributions or pension payment requirement and minimum wage is £8.60 per hour (will rise to £10/hr).

Let's look at a hypothetical capital intensive manufacturing business.  They have a turnover of £1M and currently make 8% profit before tax. They employ 10 employees on minimum wage. The owner doesnt take a salary and takes profits from dividends. Their wage bill is therefore £265k per year, the VAT bill is £200k per year and the other costs (eg rent, materials, business rates, energy etc) of the business are £454k.  They currently make an annual profit of £80k.  Corporation tax rates are 19% of the first £50k and increases to 25%. With marginal relief our company pays £17,450 in tax.  The owner pays himself £50,270 in dividends  which he pays £3,298 in tax on leaving £12,280 in retained profit in the business for a rainy day or future investment in the business.

After Rachel's budget, the owner decides to keep prices to his customers the same - he thinks revenues will fall significantly if he passes on his costs.

The company profits are therefore reduced to £55,396 after the £24k increase in wage bill.

Tax to the government in the form of EMPLOYER national insurance will increase by £10,035

Profits are lower so corporation tax falls to £10,929 (£6,521 less).

Overall TAX the business pays increases from £37,729 to £41,243 and the WAGE bill increases by £24k.

So overall the tax from this business has increased and the company is 31% less profitable.

The owner is  worse off - he can only afford to pay himself £44,467 instead of £50,270 (12% less) and there's no retained profit left in the business to weather future storms.

The owner is worse off. The business is worse off.

Who's winning?  Rachel is.

She obviously gets more tax from the company however the employees are now paying an additional £396 per year in tax and national insurance. So she will get and additional £3,960 in tax from the company's employees thanks to increasing minimum wage! 

The business owner questions whether it's worth the effort. One of his team takes 12 days sick per year compared to the others who take on average 3 days sick. This person is not as productive even when he's not sick. The owner works out that this person is costing him an extra £1,139 per year in sick days so he dismisses the person and decides to do the lost work himself and use the £28,997 saved to pay himself to compensate for the lost income and invest the remainder in machinery to scale back on the number of employees needed.

Many small businesses have not recovered from COVID and are struggling.  Hospitality is a typical sector that is struggling and these additional costs may push many businesses over the edge or force them to cut staff.

Rachel has helped the absolute smallest businesses by increasing the Employment Allowance from £5,000 to £10,500.  This is a relief subject to the de minimis rule.  Interesting the State Aid threshold is £30k over 3 years (£10k/year)  so this will breach this -  I guess wait and see what the lawyers say.

Currently the employer allowance helps small businesses with 2.5 employees or less on minimum wage.  This increase in the allowance means that it will be largely neutral for small businesses with 3.5 employees or less.  Anyone employing more than 4 people will be worse off from a National Insurance perspective.  They will obviously we worse off from an minimum wage perspective.

So what about big business?

Well also not good news.  Wetherspoons have reported that this will impact them by £60  Million.  I suspect their number is too low - I think the real number is closer to £105 M (£24,60 x 43,000 employees). So Wetherspoons turnover is £2BILLION however their profits before tax are £73 MILLION as they are a low margin business so they cant just absorb £60 Million in additional costs - it would wipe out their profits.  So either they need to lower their costs (sack people) or raise prices. Taking a very simplistic approach and adding the £60M to the £2Bn turnover, it means they need to increase prices by  3% above inflation so 5%.  So for my local that would be 14p extra on a pint then VAT on the 14p = 17p increase.  Annoying - but it wont stop me going there but it may deter others.  It will definitely be inflationary.

Sainsbury's have also reported the changes will impact them by £140M. Sainsbuey's have 175,000 employees x £2,460 = £430.5 Million so their estimate might be on the low side.  I suspect they have a large number of part-time workers however they are likely to have to pay national insurance when they currently dont.  However let's assume their numbers are correct.  Their turnover was £32Billion excluding VAT. For them it equates to 0.5% increase in prices - we probably wont notice this in our shopping.  If it turns out the impact is closer to my number then it's a 1.5% increase to your shopping time - again inflationary.