The UK Economy is driven by SMEs. They make up 99% of the businesses, account for 61% of employment1 and 25% of our Gross Domestic Product – something in the region of £2 trillion.
As inconvenient as it may be for those of a jealous disposition, the overwhelming majority of business owners are not living luxury lifestyles, in fact the median profit made by an SME in 2023 was just £13,0002.
In the October 2024 budget, Rachel Reeves announced seemingly modest increases to the National Living Wage and to Employers National Insurance contributions. In principle this was positioned to leave more pay in workers pockets. Conceptually this is admirable and I, like most in the UK, want to see our whole society prosper and thrive.
However, I fear this move is going to have dire consequences and do the exact opposite in real terms.
To understand why, first we need to delve into the numbers.
The National Living Wage is going to rise by 6.7% in April 2025 from £11.44 to £12.21. Employers National Insurance is going to rise from 13.8% to 15%. But this 1.2% increase is mathematically a rise of 8.69%.
The cost of employing a low paid worker is going up 15.39%.
The cost of employing any worker is going up at least 8.69%
In fairness, the Government will say the Employment Allowance is going from £5,000 to £10,500 but the threshold on when National Insurance is due is falling from £9,100 to £5,000. The impact of this allowance is hard to calculate but even if the effective cost increase is half the above, at 7.5%, that is still substantial.
The Government has tried to say businesses should just take this on the chin from profits, but as we have already seen, for many SMEs this is simply not possible.
The consequences of this are not good:
- Wage growth will be repressed
- Prices will increase fuelling inflation
- This in turn will keep interest rates higher for longer impacting Mortgages
- Businesses will reduce investment
- Businesses will consider contractors and / or overseas labour as they seek to reduce costs, in turn reducing the tax take
It gives me no pleasure to write I think the average worker in the UK will be worse off in the medium term as real wage growth plummets, leaving workers finding it harder and harder to cope with general inflation.
And Quelle Surprise, on 15th November, the Office for National Statistics announced a dramatic fall in growth in Quarter 3 of 2024 from 0.7% in Quarter 1, to 0.1%.
Then on 18th December, inflation was announced to have climbed from a September low of 1.7% to 2.6%.
In my opinion, the Rachel Reeves budget was bad for business and by extension, deeply damaging to our economy.
Here is what I believe we can expect in the medium term:
- Interest rates will not fall as fast as previously predicted keeping costs higher for longer
- Households and businesses will continue to reduce or defer spend impacting wider growth
- Employers will reduce hiring and reduce wage growth to cushion the impacts of the tax rises
- We will see a rise in Fractional roles and a greater use of Contracted resources both domestically and overseas
The good news for Franchising is that the vastly improved success rate of 99.% versus 50% for an independent start up3 is a key area to be championed by the sector. Further, the network of support offered by a Franchisor allows them fund research and analysis to uncover strategies to mitigate against some of these headwinds.
As the old adage goes, when the going get’s tough, the tough get going. Any form of shock presents both a challenge and an opportunity. Innovation and efficiencies will be front and centre to navigating the months and years ahead.
In my own businesses, we are diving deeper into data that every before and relentlessly driving our teams to find small incremental gains across all aspects of our business. It has focussed us to question everything all over again. To check, test, experiment and innovate.
Hang tough folks, you will get through this. Don’t be afraid to lean into the wonderful Franchising Community which is full of exceptional people. We are stronger together and community is our super power.
In the spirit of this, if anyone would like to just chat about ideas or talk things through in confidence please just get in touch.
5 years to go.
1 https://researchbriefings.files.parliament.uk/documents/SN06152/SN06152.pdf
2 https://www.statista.com/statistics/291409/uk-average-sme-profit-by-sector/#:~:text=The%20median%20profit%20made%20by,average%20profit%2C%20at%2015%2C000%20pounds
3 https://elitefranchisemagazine.co.uk/analysis/item/franchising-facts-in-2024-99-5-of-franchises-succeed-while-50-of-start-ups-fail
