What the 2023 Spring Budget means for small businesses

On Wednesday 15 March 2023, Chancellor Jeremy Hunt made his highly anticipated Spring Budget speech.

Here we explore what the key measures in the budget mean for businesses around the UK and how the proposals laid out in the chancellor’s speech have been met by the small business community.

What’s the context?

Every year, the Chancellor of the Exchequer typically makes two speeches to the House of Commons to outline the government’s financial agenda: the Autumn Statement and the Spring Statement, sometimes called Autumn and Spring ‘Budgets’.

During his last statement to the House of Commons, Hunt recognised that the UK was in a recession – and suffering from record-breaking inflation, soaring interest rates and a nationwide cost-of-living crisis. To tackle these issues, the chancellor’s Autumn Statement made some fairly bold moves intended to restore economic stability, support public services and lay the foundation for long-term growth.

The 2023 Spring Budget was said to ‘build on this foundation’ laid out by the Autumn Statement. And while it was given against a comparatively favourable economic backdrop, the chancellor's most recent statement still needed to address some significant financial challenges:

• Inflation remains high at 10.1% – despite falling from a record peak above 11% in October 2022.
• 1.1 million unfilled job vacancies coupled with high levels of economic inactivity, with 21.3% of people aged between 16 to 64 not in work and not seeking a job.
• A shrinking economy. Although The Office for Budget Responsibility (OBR), an official independent fiscal watchdog, predicts that the UK will avoid a 'technical' recession, GDP is forecast to fall by 0.2% over 2023.

Focusing on ‘Employment, Education, Enterprise and Everywhere’, Hunt’s Spring Statement outlined a raft of measures and schemes designed to tackle these economic challenges and deliver on three key priorities: halving inflation, growing the economy and getting debt to fall.

Skip ahead:

• Corporation tax rise goes ahead as planned
• Dividend tax thresholds cut still in motion
• What about support for businesses' energy bills?
• Investment zones
• Changes to research and development tax relief
• Annual Investment Allowance increases to £1 million
• Proposed changes to disability benefits
• Expansion of childcare support
• Apprenticeships for over 50s
• Pension tax reform
• The small business community’s response to the Spring Budget

Corporation tax rise goes ahead as planned

As part of his speech, Hunt confirmed that corporation tax rates will increase from April, rising from 19% to 25% for companies with over £250,000 in profits.

Since the tax hike was first announced in 2021 by then-chancellor Rishi Sunak, there's been much back and forth on whether it will go ahead. The proposed tax rate increase was repealed by Kwasi Kwarteng's so-called 'mini-budget' in September 2022, only to be reinstated by chancellor Hunt less than two months later.

While the move has been unpopular among many Conservative backbenchers and business groups, Hunt claimed that only 10% of businesses will pay the full rate of 25%. Companies with lower profits will pay staggered rates between 19%-25%, with many small businesses paying the same rate of corporation tax as they currently do.

To see whether the corporation tax rise will affect you, check out this article on calculating your turnover and working out your profit.

Dividend tax thresholds cut still in motion

As previously announced by the chancellor in his Autumn Statement, there will be significant changes to the tax-free allowances for people paid through company dividends from April 2023.

The tax-free allowance for dividends currently stands at £2,000 per year, though this is set to be cut to £1,000 from 6 April 2023 and then cut again to just £500 in April 2024.

Self-employed freelancers working through their own limited companies will likely be amongst the groups most affected by this move as they disproportionately receive income in the form of dividends from their own business rather than through a salary.

Andy Chamberlain, Director of Policy at the IPSE (Association of Independent Professionals and the Self-Employed), commented:

After the financial damage of the pandemic, exclusion from support, the impending corporation tax hike, this latest attack is further salt in the wound for anyone working through their own company. Time and again it seems our very smallest businesses are the first targets.

According to calculations by the FSB, the owner of a limited company earning £40,000 a year through company dividends will take home more than £500 less than an employee on £40,000 on PAYE tax and National Insurance from April 2023.

What about support for businesses' energy bills?

Although not mentioned by the chancellor in his budget speech, a plan for a new scheme to offer limited support to businesses with their energy bills is due to come into effect in April 2023.

Replacing the Business Energy Relief Scheme that has been in place since autumn 2022, the new Business Energy Discount Scheme will run for 12 months from 1 April 2023 and will include an estimated £5.5 billion of discounts on commercial energy bills for businesses.

The new scheme will only be available to businesses that pay more than £107 per MWh for gas and £302 per MWh for electricity and offers a discount of up to:

• £6.97 per megawatt hour (MWh) of gas
• £19.61 per MWh of electricity

Certain industries that use significantly higher levels of energy, such as manufacturing, will be eligible for larger discounts on their energy bills. Businesses in these sectors will be able to get a gas and electricity bill discount that will be capped by a maximum unit discount of £40 per MWh for gas and £89.10 per MWh for electricity.

The government has a list of all the industries that will be eligible for the higher levels of discount.

Investment zones

Jeremy Hunt announced the creation of 12 new ‘Investment Zones’ across the country, aiming to ‘drive business investment and level up the UK'.

With the aim of harnessing existing hubs of talent, each will be located around universities and research centres and, once chosen, will benefit from a funding package of £80 million over five years, made up of a mixture of spending and tax incentives.

In his budget speech, the chancellor described the scheme as focusing on driving growth in a number of key sectors, including technology, the creative industries, life sciences, manufacturing and the green sector.

The zones would be created across England in:

• The West Midlands
• Greater Manchester
• The North East
• South Yorkshire
• West Yorkshire
• The East Midlands
• Tees Valley
• Liverpool.

It was also announced that at least one investment zone would be created in each of Scotland, Wales and Northern Ireland.

The scheme represents a significantly paired-back version of the proposed system of low-tax, low-regulation investment zones announced by then-Chancellor Kwasi Kwarteng in his ‘mini-budget’ during the short-lived government of Liz Truss in 2022.

While details remain fairly scarce and details of exactly which locations will become Investment Zones will not be known for some time, the creation of geographical areas with targeted funding support and tax incentives could offer the possibility of accelerated growth and development to innovative small businesses either located within the zones or willing to re-locate.

Changes to research and development tax relief

Under previously announced plans, the R&D scheme for SMEs (including small and medium-sized businesses as well as many loss-making startups) will be drastically reduced on 1 April 2023.

Under these plans, SMEs can expect a reduction in their approximately 33% payable tax credit on qualifying R&D expenses to reduce down to roughly 19%.

Chancellor Hunt cites fraudulent tax relief claims and supposed misuse of tax credits as the primary reasons for cutting the R&D tax credit, with an estimated 5% of R&D tax claims thought to be either fraudulent or made in error in the 2021/22 financial year.

In an attempt to limit the impact of this drastic cut in R&D tax relief for SMEs, the chancellor announced in his Spring Budget that businesses in research-intensive fields such as AI, fintech and life sciences will benefit from high rates of tax credits. Businesses that spend greater than 40% of their expenditure on research and development will be able to get £27 of tax credits for every £100 they spend on R&D under the new proposals laid out by the chancellor.

Despite welcoming the additional support for R&D-intensive SMEs, the Confederation of British Industry (CBI) said:

This package still represents worse value for money for these businesses than the previous SME regime and has an incredibly high threshold of R&D intensity to qualify, while adding administrative hurdles.

The government is right to want the UK to be a science superpower – cutting relief for our most innovative businesses at the same time as increasing the corporation tax rate by six points overnight undermines this aim.

Annual Investment Allowance increases to £1 million

The chancellor announced that the Annual Investment Allowance (AIA) will be increased to £1 million, allowing businesses to claim 100% of the cost of plant and machinery against their taxable profits in the year that cost is incurred.

The increase in the allowance will run for three years from 1 April 2023 until 31 March 2026 and means that an expected 99% of all businesses will be able to deduct the full cost of investments in plant and machinery such as computers, office furniture, tools and machinery.

It’s worth noting that this practice of so-called “full-expensing” is only available to incorporated companies and does not extend to self-employed sole traders. The new scheme replaces the ‘super-deduction’ system that was introduced in 2021 which allowed businesses to deduct 130% of the value of qualifying plant and machinery under their first-year capital allowance.

Proposed changes to disability benefits

A major announcement in the budget focused on disability benefits and the way the system can act as a barrier to disabled individuals from returning to the workplace. The chancellor announced a plan to abolish the current system of work capability assessments.

This move would mean that disability benefits entitlement would be treated separately from an individual’s ability to work, meaning that, in the chancellor’s words, disabled individuals would be able to return to the workforce 'without fear of losing financial support'.

The proposal to scrap work capability assessments and replace them with a system whereby claimants are asked to demonstrate what work they might be able to take has been met with some criticism.

Vicki Nash, Head of Policy, Campaigns and Public Affairs at Mind, commented:

Scrapping work capability assessments to replace them with a system which seems to be aimed at forcing people to show how they can return to the workforce is utterly unworkable.

Elsewhere, funding has also been announced for 50,000 places on a brand new voluntary work scheme for disabled people in England and Wales to be known as Universal Support. The scheme promises a budget of £4,000 per person on the scheme per year, focusing on helping individuals find appropriate jobs and offer support once in the work environment.

The emphasis in this budget on using financial tools to encourage people to enter – or return to – the labour market will be of real importance to small businesses struggling to fill vacancies in the current economic climate. Estimates suggest that roughly 2.5 million people in the UK are missing from the labour market because of long-term sickness or disability.

Expansion of childcare support

One of the more crowd-pleasing aspects of the Spring Statement was Hunt’s plans to extend childcare support.

The UK has been facing some of the highest childcare costs in the world, on top of rocketing prices and inflation. And currently, working parents are only entitled to 30 hours of free childcare per week when their children are aged three and four.

Set to be introduced in stages until September 2025, the new policy will expand this support to some parents of children as young as nine months.

At the same time, parents who claim universal credit will benefit from more financial assistance each month – up to £951 for one child (raised from £646) and up to £1,630 for two or more children (raised from £1,108). For the first time, some of this support will be paid upfront. At the moment, parents on universal credit must pay the full costs themselves then apply for reimbursement.

As well as benefiting parents, the expansion of childcare support could also be a win for employers and the economy more generally.

Both industry bodies and parenting groups have long called for reforms to the UK's childcare system, which has been criticised for 'preventing economic growth’ and costing £23 billion in GDP as a result of 1.7 million mothers being unable to work due to childcare costs.

While the impact may not be felt immediately due to its incremental roll out, the expansion of childcare provision – along with other reforms designed to get people back into work – should go a long way towards tackling the UK's staffing crisis, and make it easier for small businesses to fill vacancies and retain employees.

Apprenticeships for over 50s

One of the main factors driving high rates of economic inactivity is an increasing number of over 50s leaving employment since the COVID-19 pandemic.

Research shows that many over 50s who left employment after the pandemic described their main reason for inactivity as retirement. The Institute for Fiscal Studies (IFS) argued that many who stopped working during this so-called ‘Great Retirement’ ‘appeared relatively well off and expressed little desire to return to work’.

In an effort to get over 50s back into work, Hunt's Spring Budget unveiled plans for ‘returnership’ apprenticeship programmes, aimed at making existing skills-building initiatives more approachable for older workers.

In theory, these programmes should benefit businesses of all size by plugging the gaps in unfilled vacancies. Yet the response to the proposed 'returnership' scheme has been somewhat unenthusiastic.

The Federation of Small Businesses (FSB) described the measure as 'token efforts at best', while in the view the CBI:

The new offer may give firms some much needed flexibility to attract and train experienced workers. However, it is unclear how an expanded skills offer will address the underlying causes of inactivity and encourage over-50s to return to employment.

Pension tax reform

In a move dubbed the biggest change in UK pension tax since 2006, Hunt's Spring Statement announced that the annual pension allowance would be increased from £40,000 to £60,000 – and that the pensions tax lifetime allowance (LTA) would be abolished.

This move was yet another bid to keep older workers in employment and encourage retirees to re-enter the labour market, and, from a business perspective, received a slighty warmer response than the 'returnership' programme.

David Gallagher, Head of Pensions at Fieldfisher, described the change as 'a welcome reform' that 'should be quite a simple change to implement and unlikely to have any transitional complexity'.

Yet the move also received its fair share of criticism, largely for principally benefitting highly paid workers and having little impact on the majority of the UK's businesses.

Among the critics was Paul Johnson, Director of the IFS, who said:

Poorly designed pensions tax allowances were increased or scrapped in an effort to encourage a relatively small number of better-off workers to stay in the workforce a bit longer. These pension tax changes are unlikely to have a big effect on overall employment.

The small business community’s response to the Spring Budget

The OBR has already predicted that the plans laid out by the Spring Budget will begin to deliver on Hunt’s three priorities: halving inflation, growing the economy and getting debt to fall.

Despite the economy being set to shrink by 0.2% in 2023, the fiscal watchdog has forecast growth of 1.8% in 2024, 2.5% in 2025 and 2.1% in 2026. It has also forecasted a fall in Consumer Price Index (CPI) inflation – which is predicted to fall to 2.9% by the end of 2023.

Yet many members of the small business community have been disappointed by the lack of targeted measures for small businesses, arguing that the chancellor’s plans don’t go far enough to support the so-called backbone of the UK economy while the economic climate remains challenging.

The FSB described the Spring Statement as ‘a snub to small business strivers’, which demonstrated ‘a clear lack of understanding of the role that SMEs will need to play in economic recovery’.

Referring to the £27 billion given to big businesses, FSB National Chair Martin McTague stated that ‘trickledown economics here simply does not work’. He told the media:

The distinct lack of new support in core areas proves that small firms are overlooked and undervalued. Budgets are about tough choices, and with today’s billions of pounds being allocated to big businesses and households, 5.5 million small businesses, and the 16 million people who work for them, will be wondering why the choice has been made to overlook them.

Commenting on the raft of measures designed to reduce the levels of economic inactivity and get people back into work, Tania Bowers, Global Public Policy Director for the Association of Professional Staffing Companies, said:

The recognition that the UK’s labour market is in a significantly challenging position is promising from our side as we have been warning for some time now that the highly skilled professional landscape is being overly-stretched.

The chancellor’s plans to reduce economic inactivity, encourage the over 50’s back into work, support those with a disability into employment and deliver better childcare provisions will help increase the number of people in work, but won’t provide the skills that are needed immediately.

The barriers to upskilling the workforce are multi-faceted and, unfortunately, not all have been addressed in Jeremy Hunt’s statement.

In a mixed response, Shevaun Haviland, Director General of the British Chambers of Commerce (BCC) described the 2023 Spring Budget as 'a step in a right direction'. She commended the chancellor's efforts to 'address the unfilled jobs blighting our economy' yet was concerned that due to reduced support for energy bills, businesses will be unable to take advantage of the more generous investment allowance:

The most recent BCC survey on investment found that only a fifth of firms were increasing investment and a similar number were reducing it. This budget looks unlikely to change that dynamic.

This is especially true for almost half of businesses who told us they will struggle to pay their energy bills from April.

They cannot invest when they are fighting to survive. Beyond the £63m of additional support targeted for leisure centres, there is little that will provide comfort to these firms.

Overall, the chancellor's Spring Budget has been met with a predictable mix of support and criticism. Efforts to support the return to the workplace of parents and early retirees will be welcomed by many businesses that are struggling to hire against a tough economic backdrop. However, the small business community has shown some scepticism over the extent to which the budget targets support towards households and larger corporations at the expense of the UK's smaller enterprises.