Written by Kunal Sawhney, CEO, Kalkine
Chancellor Rishi Sunak, in his Spring Statement, while announcing different measures, had also announced a tax cut worth up to £1,000 for smaller businesses. The measure, which became effective on 6 April 2022, is expected to benefit around half a million small UK businesses.
What exactly has changed?
The change has been made in the Employment Allowance, which now stands at £5,000 from the previously fixed level of £4,000. It means that smaller firms will now be able to claim an extra £1,000 off in their employer’s National Insurance Contributions (NICs) bills. The changes will be through payroll software or through a payroll adjustment, based on the updation status of the software.
As per the government’s estimations, the tax cut would help the smaller businesses flourish, consequently helping the nation’s economy to recover. All businesses and charities with employer NICs bills of £100,000 or lower in the passing tax year are eligible for an increased Employment Allowance of £1,000.
The increase marks the third such increase in the Employment Allowance since it was introduced eight years back in 2014; accordingly, the firms coming under its ambit can employ four full-time workers on the National Living Wage without paying any employer NICs. The announcement takes another 50,000 firms out of the realm of paying NICs and the Health and Social Care Levy, taking the total number to 670,000 businesses who don’t pay NICs and the Levy.
Brexit and Covid impact on smaller firms
The smaller firms have been struggling for a long, and the recent rise in energy prices and inflation has increased their woes. Covid, soon after Brexit, played havoc on small businesses. When the large businesses were finding it difficult to cope with the unexpected devastation of covid, small businesses were almost on the verge of collapse.
On 31 December 2020, when the one-year withdrawal period ended, chaos persisted, and the smaller businesses were the ones in the most difficult conditions, lacking resources, financial stability, and potential to relocate amid onerous paperwork. The small and medium enterprise (SME) fund set up by the government proved insufficient and was overly complex to access.
If it was not all, Covid’s arrival coincided with Brexit, and the supply chain issue ballooned to a level not seen before. The economic activity within the nation and across the globe witnessed a sharp drop. The different measures of the government like the Coronavirus Job Retention Scheme (CJRS) and some cash grants program helped the smaller businesses survive, however, their turnover witnessed a sharp drop. SMEs were deeply impacted by the pandemic, and data suggests that their debt levels increased by a third, on average.
Smaller businesses and their contribution to the economy
Smaller businesses in the UK have strategic importance to the economy. There has been a consistent rise in private sector businesses in the UK, and SMEs contribute over half of the total annual turnover of the economy. They constitute around 99 per cent of the total businesses and around three-fifths of UK employment.
The sectors that are going to benefit most from the Employment Allowance change include wholesale and retail, construction, and industries related to professional, scientific, and technical activities. It will help them in creating new job opportunities and sustain the old ones through wage increases or training from the money saved. However, there is much more to be done for the segment, which is an important cog in the wheel of economic recovery. More government and private sector funding are required for modernization and upgrading of their technological capabilities. Big businesses should also step in to help them navigate through the current market situation.