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01 April 2019

Small business blue Monday strikes as new tax regime, business rates and pension costs bite

  • Two million small businesses hit with new reporting requirements due to Making Tax Digital (MTD) programme from today
  • Up to 500,000 firms landed with fresh business rates hikes as third year of revaluation period starts
  • More than a million small employers grapple with further increase in auto-enrolment pension contributions to 3% from Saturday

Firms across the UK are bracing for a week of new cost increases and reporting requirements, with the Federation of Small Businesses (FSB) calling on government to support those impacted and rule out the introduction of fresh burdens.

From today, HMRC is forcing VAT-registered businesses to comply with its MTD initiative. The software required to meet MTD obligations alone is set to cost small firms £564 each on average.

The third year of the business rates revaluation period which began on 1 April 2017 in England and Wales also starts today, meaning thousands of firms will lose transitional caps on their rising bills.

Business rates are set to generate £25 billion for local authorities in England this year. The 10 local authorities set to rake-in the most from rates over the next 12 months are: Westminster (£2.2 billion), City of London (£1.2 billion), Camden (£650 million), Tower Hamlets (£461 million), Birmingham (£449 million), Hillingdon (£384 million), Leeds (£378 million), Manchester (£335 million), Kensington and Chelsea (£332 million) and Southwark (£328 million).

Elsewhere – with the new personal tax year starting on Saturday – small business owners will be required to put more aside for employees saving into auto-enrolment pension schemes. The minimum total contribution to such schemes will rise to 8% of an employee’s qualifying earnings, up from 5% last year. Employers will be required to shoulder 3% of the contribution.

In addition to these changes, small businesses are also facing the latest rise in the National Living Wage from today, increasing from £7.83 for workers aged over 25 to £8.21. The National Minimum Wage will also increase from £7.38 to £7.70 for those aged 21-24. These rises also mean higher National Insurance employer contributions, pension contributions and impact on differentials.

The changes take effect at a time when the Small Business Index (SBI) stands at -5.0. The index is in negative territory for the third straight quarter – a first in its nine-year history. FSB’s most-recent Impact of Government Policy Index (IGPI) shows policy interventions have caused costs to increase for small VAT-registered firms by £60,000 each on average since 2011.

The Department for Business, Energy and Industrial Strategy (BEIS)’s own statistics show there were 27,000 fewer businesses in the UK in 2018 compared to 2017.

National Chairman Mike Cherry said: “This truly is blue Monday for small business owners, and it comes at a time when confidence is already in the doldrums.

“Given the burden that MTD has placed on small business owners, it’s vital that the Government makes good on its commitment to light-touch enforcement. The software required to comply with MTD alone is setting small firms back by hundreds of pounds – and that’s before you get to the time and resource needed to negotiate new software.

"Business rates is an unfair, regressive tax that hits small firms before they’ve made their first pound in turnover, let alone profit. The help won from government to support those hurt most by the 2017 revaluation is now falling away, leaving many small businesses with a 20% hike to their bills plus an inflation-linked increase.

“While we’ve fought hard for discounts this year, a huge amount of further reform is needed. For example, a firm with a rateable value below £12,000 qualifies for 100% relief – but a firm working from a premises with a £3,000 rateable value who then expands to another space with the same value? They’re hit with a 3,000% increase in their rates bill. It’s obscene.

“Though small business owners are absolutely committed to helping employees save, auto-enrolment has already cost them significant amounts of time and money. When the 3% rate hits, the costs will be greater still.

“The Government should rule out any further increases to the minimum auto-enrolment contribution rate for employers. Equally, with the minimum employee contribution rising to 5%, we need to keep an eye on opt-outs. The danger is that these increases end up undermining the whole auto-enrolment project.

“Overall, this is a package of changes that increases the costs of running a small business. For the first time since 2010, we saw a contraction in the size of the UK business community last year. All Ministers and policymakers need to take note, and avoid bringing in new measures that would exacerbate this loss in 2019.”