One in five SMEs are cutting staff as tax and cost pressures mount, research finds

Rising taxes and operating costs forced more than one in five UK businesses (SMEs) to go out of business last year, underscoring the growing difficulties for business owners as financial pressure mounts.

Research by Rathbones, one of the UK’s largest wealth and asset management groups, found that 21 per cent of SME leaders are being forced to cut staff due to higher costs and tax burdens. A survey of more than 1,000 founders, owners and executives paints a picture of businesses that are under pressure on both a business and personal level.

Rising costs overall were cited as the biggest threat to business by 70 percent of respondents, while 58 percent said rising tax and regulatory burdens were among their most important challenges. Business rates and employer national insurance contributions have been identified as areas of stress.

This study also shows how closely related business and personal finance are for many entrepreneurs. More than a quarter of SME leaders say more than 25 percent of their wealth is tied up in their business, meaning higher operating costs are increasingly spilling over into domestic finances.

This type of difficulty is compounded by an increase in the personal tax burden. Freeze income tax restrictions continue to push business owners into higher tax brackets, while reductions in capital gains and dividend allowances, coupled with higher CGT and dividend tax, erode after-tax income. For many equity-income SME owners, these changes are forcing a re-evaluation of long-established financial strategies.

Faye Church, senior director of financial planning at Rathbones, said entrepreneurs were facing a “double whammy”.

“We always hear from business owner clients that they are determined to grow, hire and participate in the broader economy,” she said. “But increased tax pressures are increasingly stifling those ambitions. Entrepreneurs are being squeezed on both sides, higher corporate tax and rising personal tax liabilities, making it more difficult to plan, invest and build for the future.”

Church added that for many entrepreneurs the line between business and personal finance is thin, making it important to consider both together in an increasingly unpredictable tax environment.

Despite the pressure, some SMEs are adapting by restructuring their workforce. The survey found that 9 percent increased their use of freelancers or contractors, and another 9 percent switched to temporary or flexible cost management services.

Confidence in government support remains low. Almost two-thirds (62 percent) of SME leaders said they believe the government does not understand the needs of entrepreneurs. More than half (51 per cent) said targeted measures such as freeing business rates or changes to employer contributions to national insurance would directly support growth and investment.

The impact is particularly negative on hospitality. More than 35 percent of Hospitality SMEs reported being out of a job in the past year, higher than the SME average, and 69 percent say increased taxation or regulation is now one of the biggest threats they face.

These findings come as the relief for business rates during the pandemic has been reduced from 75 percent to 40 percent and will expire completely in April. While ministers have announced further support for pubs, tourism groups have warned that restaurants, hotels and other venues are at risk of being left out.

“Calls from the hospitality sector for targeted help highlight the increasing pressures facing these businesses,” Church said. “Without action, rising tax and cost burdens threaten the growth, innovation and local regeneration that the UK economy urgently needs.”