Why are small businesses struggling?

 The headlines,  as Rachels' second (and potentially last) budget approaches, suggests business will bear the brunt of this latest round of tax rises.

Small businesses are struggling.  The last budget's job tax has resulted in stagnant growth, rising unemployment and inflation. 

Given Rachel's rallying battle cry of "Grow Baby Grow" she is totally unaware of cause and effect.

So let's look back to happier years when the economy was growing at 1.4% (compared to 0.1% growth last quarter). 

Back in 2012 the VAT threshold where businesses had to register for VAT was £77,000.  Using the bank of England inflation calculator the threshold would be £111,370 today has it kept pace with inflation. The current threshold is £90,000.  So in real terms the threshold has not increased since 2021.  This is another example of fiscal drag.

For consumer facing businesses the VAT threshold is a big hurdle. Firstly you either have to increase your prices by 20% or reduce your profit margin.  In reality what happens is many businesses avoid trading in excess of the threshold - they deliberately decide to stay small and treat the business as a hobby.  Assuming the threshold doesnt increase (or it decreases) as inflation steals our money expect small businesses to shut up shop as their business becomes uneconomic to keep going since the wall of VAT registration is too big a barrier which eventually has to be crossed.

The threshold is a growth deterrent and is currently 24% below where it should be. I personally know businesses that simply decide not to sell more since it would trigger VAT registration and completely alter the economics of the business. Given the majority of businesses employing people in the UK are small businesses this suggests many small businesses are making a conscious decision not to grow.

Back in 2012 the minimum wage was £6.19 per hour. Had minimum wage increased in-line with inflation it would be £8.95 per hour however it is now £12.21 per hour so it's 36% higher than it should be had it increased in line with inflation.  Although not set in stone, the minimum wage is widely expected to increase in April 2026 to £12.86 (+5.3%).  Given inflation is running at 4% this is above inflation. 

Businesses have a choice with regards to employment.  If staff costs increase by 5.3% then either prices have to increase by 5.3% (ie lock in the inflation spiral) or costs have to reduce by 5.3% (reduce staff causing unemployment).

The main things affecting business are tax, staff costs, energy and premises.

So lets look at energy.

Back in 2012 the cost of a kwh of electricity was 14.8p from EON for both consumers and business.  Fast forward to 2025 and using the inflation calculator the price should be 21.4p/kwh.  The typical price for a consumer kwh of electric is 26.35p in 2025.  For micro businesses (under 15,000 kwh consumption per year) the cost is 29.2p/kwh. So small businesses are paying 36% more for their electricity relative to 2012.  If you compare our energy prices to our global competitors, our rates are at least double what they need to be to be competitive.

So it's not a surprise then that small businesses are struggling.  In real terms some of their primary costs are 36% higher than they should be.

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Well Rachel has scrapped






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