What the Chancellor’s Tax Shake-Up Means for Small Businesses

With only weeks to go until the Budget, reports that the Chancellor is preparing to raise income tax have sparked fresh questions for small businesses.

The reported plan involves increasing income tax by 2p and lowering employee National Insurance by 2p – a shift that moves more of the tax burden onto groups that do not benefit from NI cuts, including pensioners, landlords and many self-employed workers.

To help clarify the full effect of these measures, the Office for Budget Responsibility is set to release its assessment of the plans to the Treasury on Monday, ahead of the 26 November Budget.

While small businesses are not directly targeted by the moves, the wider effects could still have an impact.

What it Means for Employers

As speculation around potential hikes to employer National Insurance Contributions Budget continue to cause concerns for businesses – particularly SMEs – these particular tax rises won’t directly impact staffing costs. Even so, that doesn’t mean further taxes or wider economic pressures won’t arise down the line. 

Workers whose earnings fall within the NI threshold are unlikely to see any meaningful change in their take-home pay. For employers already dealing with rising energy bills, higher rents and more expensive insurance, the overall cost pressure should also remain broadly the same, again assuming further economic shocks don’t materialise and add new financial strain.

Implications for the Self-Employed

For sole traders, freelancers and contractors who often operate on tight budgets, even a small reduction in disposable income can make day-to-day finances harder. Any drop in income, however modest, can make it more difficult to cover essential business expenses or absorb unexpected costs.

The National Insurance reduction may also apply only to earnings under £50,270 a year, with income above that level still charged at a two per cent rate. Many self-employed workers pay income tax but do not pay the NI category that would be reduced, which means facing the income tax rise without any offsetting benefit. Together, these elements could place additional pressure on self-employed workers who already operate with limited financial flexibility.

Customer Spending and Indirect Pressures

Any reduction in disposable income for pensioners or self-employed workers could influence customer spending, even if the effect is small. For small businesses that rely on steady demand – particularly retailers, hospitality businesses and local service providers – slight shifts in spending habits may still be felt.

Landlords could also face higher tax bills under the reported measures. If commercial landlords pass these costs on to tenants, small businesses renting shop units or office space could see higher rents in the future.

A Measured but Notable Impact

The move forms part of the Government’s wider argument that repairing public finances is necessary to protect key services and support long-term economic stability. Whether the Budget ultimately leads to stronger infrastructure and better services that benefit small businesses over time remains to be seen.For now, the impact of these specific taxes on SMEs appears measured rather than dramatic. However, employers aren’t out of the woods yet. Final Budget details will determine how much more drastic existing challenges will become.