This article is by Alex Austin, Managing Director, Paddock Capital
Small businesses went into last week’s Budget feeling incredibly apprehensive – not because of anything officially announced, but because the weeks leading up to it were filled with leaks, warnings and half-baked ideas that chipped away at confidence.
By the time the Chancellor made it to the despatch box, the damage was done. The uncertainty and anxiety hanging over small businesses had already impacted them far more than any single fiscal measure could.
There was a brief moment of relief when the likes of a rumoured VAT threshold cut didn’t make an appearance. That would have created chaos and financial pain for thousands of small businesses, and the decision to leave it alone was one clear positive. That sense of relief evaporated quickly though, as the actual contents of the Budget made it clear that small businesses were far from the top of Rachel Reeves’ agenda.
Business owners already pay corporation tax on every pound of profit they make. Now they face an additional hit, with both the ordinary and upper rates of dividend tax rising by two percent. That’s almost a 25% increase for those on the ordinary rate. For many SME owners, dividends aren’t a luxury – they’re a crucial element of the income they rely on to keep their families running, the mortgage paid and the lights on. This shift means even those who somehow manage to remain profitable in a difficult market will keep less of what they’ve earned.
Another sector feeling the pressure acutely is hospitality. The industry, which has been pushed to the edge for years, is expected to absorb the living wage increase without any meaningful support, other than a token gesture on business rates. When you break down the numbers, the situation becomes painfully clear.
A restaurant employing 30 staff on the living wage – who each work an industry average 26 hours a week – is staring down the barrel of an extra £20,000 a year in wage costs. That’s a cost increase you can’t paper over with clever scheduling or minor price adjustments. It forces businesses into serious decisions about staff cuts, reduced hours, menu changes and – in the worst cases – closure. It’s the kind of burden that exposes how wide the gap between policy intention and the real world businesses operate in is.
The shambolic OBR leak on Budget morning meant there was no opportunity for the Chancellor to pull any rabbits out of the hat, but it seems the hutch was empty anyway when it came to supporting small businesses.
What really stings though, is the environment that was allowed to build before the Budget. Confidence is one of the most valuable assets in business, and it’s fragile. When owners face weeks of speculation and political noise, they hold back. Hiring pauses. Investment and funding stalls. Projects are put on hold. That slowdown becomes self fulfilling, and the Budget did nothing to counteract it. If anything, it reinforced the idea that small businesses are expected to weather storms without any meaningful support from this Government.
This shift in sentiment will also have consequences in the funding market. Lenders react directly to confidence levels, and when mood sours, credit appetite tends to tighten. Over the coming months it’s likely we’ll see more caution from banks and alternative lenders, whether that’s through longer decision times, reduced risk appetite or tougher security requirements. Deals that felt straightforward last year may well become slower and more heavily scrutinised.
And when traditional funding channels become less supportive, small businesses naturally drift toward shorter term, higher cost options. Those products have their place, but they’re not designed to fuel sustainable growth. They’re a lifeline, not a launchpad, and too many small business owners will be looking to them as the former.
Small businesses needed clarity, stability and a sense that the Government was willing to back them at a pivotal moment. What they got instead was a rise in tax, a rise in costs and a rise in uncertainty. The rhetoric may still talk about growth, but the reality is that SMEs are being left to push uphill with very little support from Westminster. They’ll adapt as they always do, but this Budget has made their climb steeper at the exact moment they needed firmer ground beneath them.