SMEs: The Backbone of Britain — and the Weight They're Being Asked to Bear 

Since Labour’s election victory in July 2024, small and medium-sized enterprises have faced a succession of policy and legislative changes that have materially altered the cost of doing business and the environment in which they operate. In this piece, I look at what SMEs mean to the UK economy, what has changed, and what the next twelve months may hold.  

Why SMEs Matter: The Numbers Behind the Narrative 

There is a tendency, when politicians talk about the economy, to reach for the large-firm examples — the major manufacturers, the listed banks, the global tech platforms. The story of British business, however, is not told in those board rooms. It is told in the workshops, consulting rooms, retail units, restaurants, care homes and offices of the UK’s 5.7 million small and medium-sized enterprises. 

The statistics are striking. According to the most recent government business population estimates, SMEs account for 99.9% of all private sector businesses in the UK. They collectively employ around 16.6 million people — approximately 60% of the entire private sector workforce — and generate over £2.8 trillion in annual turnover, representing 52% of total private sector output. 

Contrary to the impression sometimes given, this is not simply a legacy of the past. SME numbers have grown by 59% since 2000, and a 2025 CEBR report attributed to SMEs 60% of private-sector job growth and 70% of innovation output. A separate Barclays analysis published last year concluded that if UK SMEs invested at the same rate as larger companies, it would unlock an additional £60 billion of investment annually into the UK economy. The government’s own figures suggest that accelerating SME growth by just 1% a year could add £320 billion to the economy by 2030, benefiting both small and medium enterprises. 

“The health of the SME sector is not a niche policy question. It is one of the most important determinants of whether the UK’s growth ambitions are realised.” 

The Autumn Budget 2024: A Watershed Moment for SME Costs 

The Labour government’s first Budget, delivered by Chancellor Rachel Reeves in October 2024, was the policy event that most immediately and materially affected SME profitability. While the headline rate of Corporation Tax remained unchanged — capped at 25% for the duration of this Parliament — two announcements in particular sent shockwaves through the small business community. 

Employer National Insurance Contributions 

The most significant single change was the increase in employer National Insurance Contributions (NICs). The rate rose from 13.8% to 15%, and — crucially — the threshold at which employers begin to pay NICs was cut from £9,100 to £5,000 per employee. The combined effect of a higher rate applied to a lower threshold was severe. For a small business employing ten people on average wages, the additional annual NICs burden amounted to somewhere between £10,000 and £15,000. For labour-intensive businesses in sectors such as hospitality, retail, social care, childcare and logistics — many of which were already operating on thin margins — this was a significant blow. 

The government did increase the Employment Allowance (which reduces NICs bills for smaller employers) from £5,000 to £10,500, which offered some mitigation. But the consensus among business groups, including the Federation of Small Businesses and the British Chambers of Commerce, was that the NICs changes nonetheless represented a net cost increase for the majority of SME employers — and one that arrived at a time when businesses were still absorbing the cost pressures of the post-pandemic period and the cost-of-living crisis. 

The consequences were not slow to materialise. Reports of recruitment freezes, reductions in working hours, pay restraint and, in some cases, redundancies followed quickly, particularly affecting small and medium enterprises. The Bank of England and OBR each cited employer NICs as a factor in subdued employment data in the first half of 2025. 

Business Asset Disposal Relief and Capital Gains Tax 

The 2024 Budget also delivered a significant change for business owners contemplating exit. Business Asset Disposal Relief (BADR) — formerly known as Entrepreneurs’ Relief, and one of the key incentives for taking the risk of building a business — saw its headline rate increased from 10% to 14% from April 2025, with a further increase to 18% confirmed for April 2026. For an owner-manager who has spent years building a business and was hoping to sell, the increase represents a materially higher tax cost on their eventual exit. 

At the same time, the general capital gains tax (CGT) rates for higher and additional rate taxpayers were raised from 20% to 24% on most assets. The cumulative message to entrepreneurs was uncomfortable: the reward for the risk of business ownership was being reduced. I have seen this sentiment reflected in client conversations — particularly among founders in their fifties and sixties who had been planning their exit timelines on the basis of the previous regime. 

National Living Wage Increases 

Also taking effect from April 2025 was a significant increase in the National Living Wage — rising to £12.21 per hour for workers aged 21 and over, and to £10 per hour for 18-20 year olds. A further increase to £12.71 per hour was confirmed for April 2026. In isolation, each of these increases is modest but, collectively, they can significantly impact small and medium enterprises. In combination with the NICs changes, and applied across a workforce of even five to ten people, the cumulative effect on payroll costs has been substantial — particularly for businesses in sectors where labour represents the majority of operating costs. 

The 2024 Autumn Budget: key changes at a glance for SMEs, especially those with fewer than 50 employees 

• Employer NICs rate increased from 13.8% to 15% (April 2025) 
• NICs secondary threshold cut from £9,100 to £5,000 per employee (April 2025) 
• Employment Allowance increased from £5,000 to £10,500 (partial mitigation) 
• Business Asset Disposal Relief rate raised from 10% to 14% (April 2025), rising to 18% (April 2026) 
• Capital gains tax upper rates increased from 20% to 24% on non-residential assets 
• National Living Wage increased to £12.21/hour for over-21s (April 2025), rising to £12.71 (April 2026) 
• Corporation tax rate capped at 25% — no change 
• SEIS and EIS schemes broadly unchanged (a positive for start-up investment), especially for SMEs defined under the European Union guidelines. 

The Employment Rights Act 2025: A Generation of Change for Employers 

If the Autumn Budget 2024 was the financial shock, the Employment Rights Act 2025 represents the structural one. The Bill was introduced in October 2024 — less than four months after the election — and received Royal Assent in December 2025, described by ministers as the most extensive overhaul of workers’ rights in a generation. For SME employers, it introduces a set of changes that will, over the course of 2026 and 2027, fundamentally alter the employment relationship. 

Unfair Dismissal — Reduced Qualifying Period 

One of the most significant changes — initially proposed as a day-one right, but later moderated following business pushback — is a substantial reduction in the qualifying period for unfair dismissal claims. The government has confirmed the qualifying period will be reduced, likely to around nine months, with implementation expected in 2026, impacting small and medium enterprises significantly. For small employers who rely on the current two-year qualifying period to manage performance or operational risk during an employee’s early tenure, this is a meaningful constraint. 

Compounding this is the removal of the statutory cap on unfair dismissal compensation — previously the lower of one year’s pay or £118,223. The removal of this cap, which was introduced late in the parliamentary process as a surprise amendment, will significantly increase the financial risk for businesses facing dismissal claims from higher-earning employees. 

Zero Hours Contracts and Guaranteed Hours 

The Act introduces a duty on employers to offer guaranteed hours contracts to zero-hours and low-hours workers whose actual hours consistently exceed their contractual minimum — assessed over a twelve-week reference period. While the detail of the regime is still being worked through secondary legislation and consultation, the direction of travel is clear: casual, flexible workforce arrangements that many SMEs — particularly in hospitality, retail, care and logistics — have relied upon for operational flexibility will become materially harder to maintain. 

The Act also requires employers to give reasonable advance notice of shifts, and to pay compensation for short-notice cancellations. These provisions, which come into force progressively through 2026 and 2027, will require SMEs to invest in workforce planning systems and HR processes that many currently manage informally. 

Fire and Rehire Restrictions 

The Act creates a new category of automatically unfair dismissal for so-called ‘fire and rehire’ practices — where an employer dismisses an employee and re-engages them on less favourable terms, impacting SMEs with fewer than 50 employees. The restriction applies to changes to a defined set of ‘restricted variation’ terms, including pay, hours, holidays and pension arrangements, particularly for SMEs that employ fewer than 250 employees. While there is an exception for businesses in extreme financial distress, the tightening of these rules removes a tool that employers — including some SMEs facing genuine commercial pressures — have historically used to restructure their workforce costs. 

Trade Unions and Collective Rights 

The Act also significantly strengthens trade union rights. The Strikes (Minimum Service Levels) Act 2023 was repealed immediately on Royal Assent, and the majority of the Trade Union Act 2016 — including the thresholds for strike ballot turnout — is being dismantled. Unions now have stronger rights of access to workplaces, the process for gaining recognition has been streamlined, and employers of small and medium enterprises will be required to inform employees of their right to join a union. For SMEs that are not currently unionised, these changes increase the likelihood of union organising activity and the complexity of managing any resulting recognition process. 

Statutory Sick Pay and Parental Leave 

The Act also removes the lower earnings threshold for Statutory Sick Pay (SSP), meaning that all employees — regardless of earnings — will qualify for SSP from day one of their illness (subject to consultation on the implementation detail). Bereavement leave following a pregnancy loss has also been introduced. These are measures with genuine human merit; but for small employers without the HR infrastructure of larger organisations, managing the administrative and cost implications will require attention. 

Key Employment Rights Act 2025 changes SMEs should plan for: 

• Unfair dismissal qualifying period substantially reduced — expected from April 2026 
• Cap on unfair dismissal compensation removed — significantly increases risk for higher-earning employees 
• Duty to offer guaranteed hours to qualifying zero/low-hours workers — from 2026/27 
• Minimum shift notice requirements and short-notice cancellation compensation 
• Fire and rehire restrictions on changes to core employment terms (pay, hours, holidays, pensions) are particularly relevant for SMEs with fewer than 50 employees. 
• Strengthened trade union access and recognition rights — phased from December 2025 through 2026 
• SSP extended to all employees regardless of earnings, from day one 
• Collective redundancy rules tightened — maximum protective award doubled to 180 days’ pay, significantly affecting SMEs with fewer than 250 employees. 
• Flexible working refusals must be objectively reasonable from 2027 

The Autumn Budget 2025: More Pressure, Some Relief 

The second Budget of the Labour government, delivered in November 2025, contained fewer shocks than its predecessor — but continued the pattern of incremental cost pressure for business owners alongside some targeted measures that SMEs may welcome. 

The increase in dividend tax rates — up by two percentage points to 10.75% (basic rate) and 35.75% (higher rate) from April 2026 — will be felt most acutely by owner-managers of limited companies who extract profits through dividends. This is a particularly common arrangement among SME founders, for whom the salary-plus-dividend model has historically been a tax-efficient means of remuneration in medium-sized businesses. The steady erosion of this model — through dividend tax rate rises in 2016, 2022 and now 2026 — is a trend that business owners should take seriously when reviewing their remuneration structures. 

The Business Asset Disposal Relief rate increase to 18% from April 2026 compounds the 2024 Budget change and continues to raise the effective cost of business exits. For owners planning to sell within the next few years, particularly those operating SMEs with a balance sheet total under the EU threshold, the window for locking in more favourable BADR treatment is narrowing. 

On the more positive side, the 2025 Budget introduced permanently lower business rates multipliers for retail, hospitality and leisure properties with rateable values under £500,000, taking effect from April 2026. Pubs and music venues received a specific 15% discount on their bills. For SMEs in the hospitality and leisure sectors — among those hardest hit by cost increases — this offers some genuine relief on what has historically been one of their most significant fixed overhead costs. 

The Budget also expanded the investment limits for the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) — welcome news for growth-stage SMEs seeking equity finance, even if the reduction in VCT income tax relief from 30% to 20% was a counterweight. The R&D regime remained unchanged for most SMEs, with the Enhanced R&D Intensive Support (ERIS) scheme continuing to offer a meaningful cash tax credit of up to 27% of qualifying expenditure for loss-making, R&D-intensive small companies. 

2025 Autumn Budget: what it means in practice for SMEs 

• Dividend tax rates up 2 percentage points from April 2026 — review remuneration structures 
• BADR rate rises to 18% from April 2026 — earlier exit planning becomes more important 
• Lower business rate multipliers for retail, hospitality and leisure from April 2026 
• EIS/VCT company investment limits expanded — positive for growth-stage fundraising 
• VCT income tax relief cut from 30% to 20% — reduces attractiveness for investors 
• Writing-down capital allowances reduced from 18% to 14% from April 2026 — raises tax burden on capex 
• Making Tax Digital for income tax self-assessment entering its next phase from 2026-27 
• Inheritance Tax Business Property Relief restricted from April 2026 — important for succession planning 

The Government’s Small Business Plan: Intentions vs Reality 

In July 2025, the government published its first dedicated Small Business Plan in over a decade — a ‘Backing Your Business’ strategy developed in collaboration with business groups. The plan contained a number of positive commitments, including: a target to reduce the administrative costs of regulation for SMEs by 25%; new public procurement targets requiring central government departments to set three-year targets for direct SME spend from April 2025; an expansion of the British Business Bank’s capacity, with a commitment to the Growth Guarantee Scheme and an ENABLE Guarantee expanded to £5 billion; expanded start-up loans; and investment in digital adoption and apprenticeship access. 

These are meaningful measures for small and medium enterprises. The late payment proposals announced separately — a package of legislative reforms aimed at ensuring SMEs are paid on time, including tougher rules on prompt payment reporting and potential supply chain payment obligations — are long overdue and genuinely important. Late payment remains one of the most destructive structural problems for small businesses, and strengthening the legal framework around it is unambiguously positive. 

The tension, however, is real. It is difficult to square the language of SME support in the Small Business Plan with the reality of the cost increases imposed on the same businesses by the Autumn Budget and the Employment Rights Act. Business closures hit a twenty-year high in early 2025. SME sentiment surveys showed confidence at multi-year lows in the months following the 2024 Budget. The Federation of Small Businesses described the NICs rise as representing a fundamental breach of trust with the small business community. 

“The government cannot credibly pursue a growth agenda while simultaneously making it materially more expensive to employ people, build businesses and sell them.” 

The government’s position is that higher labour costs are justified by their social purpose — better pay, more secure employment, stronger trade unions — and that its investment in the British Business Bank, SME procurement access and skills investment will more than compensate for the fiscal headwinds it has created. Whether that argument holds up over the next twelve months is the central question for SME owners across the country. 

The Outlook for the Next Twelve Months 

Looking ahead to the period through to early 2027, the picture for UK SMEs is, I think, one of cautious resilience rather than crisis — but with the stress points concentrated in specific sectors and among specific types of business. 

Cost pressures will remain elevated — but may stabilise 

The principal shock — the April 2025 NICs changes — has now been absorbed into business cost structures. The next wave of Employment Rights Act obligations will come into force in phases through 2026, with the most significant (guaranteed hours, fire and rehire restrictions, reduced unfair dismissal qualifying period) largely anticipated and already being planned for by forward-thinking employers. The further increase in NLW and BADR are known quantities that businesses can plan around. 

The risk is not so much the individual measures but their cumulative effect. Businesses that successfully adapted to post-2020 inflation and supply chain pressures now face a third wave of structural cost increases. For those with the cash reserves and management capacity to adapt, this is manageable. For businesses with thin margins — particularly in hospitality, social care, retail and childcare — the risk of failure remains elevated. 

Investment confidence: room for cautious optimism 

Not all the signals are negative. Inflation has eased significantly from its 2023 peaks. Interest rate cuts — though more gradual than many had hoped — are reducing the cost of borrowing. A 2025 Barclays survey found 53% of SMEs intending to increase investment in the next twelve months, indicating a positive trend for medium-sized businesses. Five major high street banks agreed an £11 billion SME lending package in early 2026. The British Business Bank’s expanded capacity and the government’s commitment to the Growth Guarantee Scheme provide a meaningful funding backstop for businesses seeking to invest and grow. 

The ONS recorded expansion across all sectors of the UK economy in February 2025 — better than expected — and surveys suggest 89% of SMEs retain optimism about their medium-term growth prospects. The UK’s position as a globally competitive destination for venture capital (ranked third globally, with £16.3 billion raised in 2024) continues to support the start-up ecosystem that feeds the SME pipeline. 

M&A activity: value and opportunity 

In my own practice, I am seeing continued healthy levels of M&A activity in the SME market. Business owners who had been contemplating an exit are now more likely to press ahead — both because valuations remain supportive and because the trajectory of BADR changes gives a clear financial incentive to complete a transaction before April 2026 rather than after. Buyers remain active, particularly in the healthcare, professional services, technology-enabled services and food and drink sectors. 

The combination of owners who want to exit before BADR rises further, and buyers (including private equity-backed platforms and strategic acquirers) who see opportunity in the market, is likely to sustain deal volume through 2026. For SME owners considering a sale, now is as good a time as I have seen to take professional advice and get transaction-ready. 

Legislative compliance: a practical priority 

The Employment Rights Act 2025 is not going away, and the pace of its implementation — with major provisions coming in from April 2026 — means that SME employers need to begin preparing now. That means reviewing employment contracts and policies, stress-testing workforce models that rely on zero-hours or casual arrangements, and considering whether existing remuneration structures remain appropriate in the light of the NICs changes and the dividend tax increase. 

For businesses that are still without a shareholders’ agreement, or whose existing agreements were drafted before the recent wave of corporate law and tax changes, a review is overdue. The risk of shareholder disputes, leaver events and succession challenges does not diminish in a tighter economic environment — it increases. 

A word on the political environment 

Labour’s polling has declined sharply since the 2024 election — largely driven by SME and business community sentiment following the Autumn Budget. The government is aware of this, and the Small Business Plan and various targeted reliefs (including business rates reductions and the five-bank lending package) represent an attempt to demonstrate renewed engagement with the sector. Whether further policy adjustments follow — particularly on NICs or BADR — remains to be seen, but there is more political pressure on this government to respond to SME concerns than at any point since it took office. 

Concluding Thoughts 

SMEs are not simply a category of business. They are, in the most literal sense, the fabric of the British economy and the communities within it. Every decision made in Whitehall that affects their ability to trade profitably, employ people and plan for the future has consequences that extend far beyond the balance sheet. 

The last eighteen months have been genuinely difficult for many small businesses. The combination of higher employment costs, a more restrictive employment law environment, increased CGT on business exits and the broader fiscal tightening has created a challenging backdrop. Some of those changes are well-intentioned and will, over time, be absorbed. Others represent a structural shift in the cost of running a business in this country that owners will need to adapt to, not wait for reversal. 

The businesses that will navigate this period most successfully are those that plan proactively — reviewing their corporate structures, employment practices, commercial agreements and financing arrangements in light of the new environment — rather than those that wait and react. That has always been true of good business management, and it is particularly true now. 

At Ronald Fletcher Baker, we work closely with owner-managed businesses and entrepreneurs across the UK, advising on the legal and structural issues that sit at the heart of running a successful business. If any of the issues raised in this article are relevant to your circumstances — whether that is planning a transaction, reviewing your corporate structure, putting a shareholders’ agreement in place, or navigating the Employment Rights Act changes — I would be delighted to have a conversation.