Jagannadha Pawan Tamvada, Kingston University

There are nearly 5.5 million businesses in the UK. It may come as a surprise, however, to learn that most of these (about 4.1 million) are not employers. They might be, for example, the sole traders we call to fix our leaky roof or the freelance workers providing support to bigger firms.

Of the remaining 1.4 million UK businesses that employ staff, most are micro and small businesses (meaning they have up to 49 employees) and 38,000 are medium-sized businesses (with 50-250 employees). Only 8,000 firms in the UK are large businesses with 250 or more employees.

Together, the small and medium-sized businesses provide employment for nearly 60% of the UK workforce.

One of the biggest talking points after the new Labour government’s first budget was the increase in employer national insurance (NI) contributions by 1.2 percentage points across the board to 15%.

On top of this, chancellor Rachel Reeves announced that the threshold at which employers start paying NI contributions on each employee’s salary is dropping from £9,100 to £5,000, causing anger among many business owners.

To an extent, these changes were counter-balanced by the increased employment allowance, which lets eligible businesses reduce their NI liabilities, from £5,000 to £10,500 a year. It works by letting some companies pay less in NI contributions each payroll until the allowance is used up, and the move was an attempt by Reeves to protect the smallest employers from increased NI contributions.

An estimated 1 million employers will pay the same or less in employer NI contributions than they did previously, according to the chancellor.

However, the decision to increase the employer NI contributions is still likely to put a significant strain on those small businesses that generate employment, particularly those that are on the brink – that is, those businesses that have low profit margins or are in losses. At least one in five SMEs (small and medium-sized enterprises) has been in this situation over the last decade. And given their importance as employers in the UK, achieving sustained and inclusive economic growth depends on their success.

How will employers respond?

To cope with this unexpected cost, businesses are likely to take measures to compensate for the increased costs of having employees unless their productivity or profits increase. Neither of these things is easy to achieve in the immediate short run, however.

Such cost-cutting measures could include freezing any planned recruitment, reducing wages to compensate for the additional taxes or cutting down on future investment. They could even include closing the business – unless of course the promised additional public investment leads to an overall improvement in the market conditions that these businesses face. Struggling employers may start to cut shifts, staff or wages. PeopleImages.com-Yuri A/Shutterstock

In 2023-24, more businesses folded than were started in the UK. It is estimated that the total number of businesses decreased by 56,000 – of which 18,000 were companies that employ staff rather than being sole traders or other solo ventures.

This trend is likely to continue over the next few years unless measures are put in place to support these small businesses that are on the brink. These measures could include innovation grants, low-interest credit options, offering support when there are policy-induced reasons for business failure, and initiatives to help small businesses find new markets beyond the UK.

Trickle-down economics has typically argued that rewarding the top 1% is key to maintaining private sector investment and growth – however, the strategy has not always worked out like that in practice. For example, it failed spectacularly under former prime minister Liz Truss when she and chancellor Kwasi Kwarteng introduced their now infamous mini-budget in 2022.

Reeves’ budget does the opposite. By taxing businesses and through borrowing, it increases spending for state schools, investment in the NHS and public services, minimum wage rises, and freezes the fuel duty – measures that the International Monetary Fund has commended.

But a significant proportion of those businesses are SMEs that are just about managing their balance sheets and will need additional support. According to a pre-budget survey of 1,000 UK business leaders, business confidence has fallen but remained high while regulations, customer demand, competition and tax burdens are significant challenges.

While there could be positive impacts in the long term from the new public investment, there is a real prospect that the increased NI employer contributions could create a negative business sentiment, leading to recruitment and pay freezes and more business closures. So there is an urgent need now to provide support for the small businesses that create employment in the UK. Without them – and the jobs they support – the UK will struggle to achieve the inclusive growth it is chasing.

Jagannadha Pawan Tamvada, Professor of Entrepreneurship, Kingston University

This article is republished from The Conversation under a Creative Commons license. Read the original article.