The increase in employer National Insurance contributions announced in The Budget could prove to be a fatal blow to thousands of small businesses, despite the increase in the Employment Allowance It's a sucker punch after a gruelling few years for many traders in labour intensive sectors such as hospitality, leisure and retail. These businesses are still recovering from the impacts of COVID-19 and dealing with a high inflation economy where consumers have pulled back from spending.
The Employer NICs have already been increasing in these sectors due to the introduction of the National Living Wage rate which has put more individuals above the £175 a week threshold where the tax is charged to the employer. This, against a backdrop of business rate relief ending, inflation and supply chain costs.
At Purbeck, we know the extreme financial pressure these businesses are already under through our experience offering personal guarantee insurance to protect the personal assets of directors/owners taking out business loans. Our data shows the main reason for personal guarantee backed business loans taken by the UK's small firms are for working capital to just keep the business going. In fact in Q3 2024, 38% of the loan applications we supported were for that purpose. Just 13% were for growth initiatives.
NICs are already the UKs second biggest tax, behind income tax with the bulk of this making up an estimated 63% of revenue in 2023 to 2024.
Ultimately, this increase will make it more expensive to run a business and will impact the people employed by limiting hiring plans, reducing wage inflation, forcing redundancies and scaling back pension contributions. It will also trickle down to customers through increased costs and poorer service if the business is having to operate with fewer staff.
There will be thousands of business people who have put their home and life savings on the line by signing a personal guarantee for a business loan who will now face some very difficult choices. Then there will be thousands more who need a bigger loan than anticipated to help cope with the increased costs in the short term, while they endeavour to get their business on a path to growth.
Whatever the situation, Purbeck Insurance Services will be there for those directors who have taken personal guarantee insurance to support them through, as we did during the pandemic. Insurance works best when it helps the policyholder mitigate the risk of a claim and that's exactly what we endeavour to do through the mentoring support and advice we offer when a business gets into financial difficulty.
Inevitably, when times are tough, costs come under greater scrutiny but it is precisely in these times that insurance really can prove its value. Any new business should ensure they have adequate protection in place and that extends to protecting the risk of signing a personal guarantee.
