Small Firms to be hit by Pension Contribution Rates Increase

Big changes to the UK pensions system which came into effect on the 6th April 2018 could have a significant impact on small- and medium-sized businesses. From the start of the new financial year, employer contributions to auto-enrolment pension pots rose from 1% of pensionable pay to 2%, while other changes to the tax system could also put extra pressure on the finances of small enterprises.

Around four million small business owners may have to tighten their belts as a delay to the scrapping of Class 2 National Insurance could leave them £150 worse off. The levy was scheduled to have been scrapped on April 6th, but plans to do away with Class 2 National Insurance have been temporarily put on hold.

How Will These Changes Impact Small Businesses?

At a time when the economy is still struggling and Brexit uncertainty is impacting the finances of many smaller companies, the 1% increase in auto-enrolment employer pension contributions could hit startups and small businesses hard.

Staff could also feel the pinch as the new changes take effect. A worker on an average salary of £27,000 will have to pay in an additional £350 this year, rising to £700 come next April.

Speaking to the BBC, Rebecca Goldring of accountancy firm Blick Rothenberg said ‘The increase in monthly auto-enrolment pension contributions may result in a decrease in take-home pay for some workers. For many, this increase will feel like a harsh jolt.’

Other changes which came into effect include a reduction in the dividend allowance, falling from £5,000 to £2,000. While the turnover threshold for VAT has been frozen at £85,000 until 2020, the limit on the Enterprise Investment Scheme (EIS) was doubled to £2 million.

Critical Reception

The changes have received a critical reception from some big industry names, who believe the doubling of the auto-enrolment employer contributions will hit small businesses and start-ups the hardest, with many small enterprises only having set up such pension schemes in the last few months.

Stressing that smaller companies needed help to implement these changes, the national chairman of the Federation of Small Businesses, Mike Cherry, has said that ‘small business owners want to see employees save, but more needs to be done to help firms absorb high labour costs. That starts with increasing the Employment Allowance to £4,000. At the same time, new incentives need to be put in place to encourage the self-employed, who miss out on auto-enrolment, to save for the future.’

Cherry goes on to say that those operating in labour-intensive industries such as construction, retail and childcare would feel the pinch most acutely, as these are sectors already struggling with a skills gap and high inflation rates.

Curbing Innovation

One of the main concerns around the new changes is the knock-on effect it may have on those thinking of branching out and setting up their own small businesses. Potential entrepreneurs may be deterred by the 60% drop in the dividend allowance.

Some firms could even deliberately curb their activities as they approached the £85,000 turnover mark to avoid tipping over into the VAT threshold. Cherry is now calling for a ‘smoothing mechanism’ to ease the procedure, making it less of a cliff edge for small businesses which might otherwise limit the amount of work they were taking on.

Silver Linings?

While many have voiced concerns over the changes implemented on 6th April, there are also a few pieces of welcome news for businesses owners. The FSB has welcomed the VAT freeze, given that this is one of the most time-consuming taxes with which small businesses have to wrestle, taking up an average working week per annum to handle.

The FSB also welcomed the increased limit for the Enterprise Investment Scheme. Until now, only around two-thirds of small businesses were aware of the scheme, so it is hoped that the limit rise will help more small companies take advantage.

Overall, however, the changes introduced for the new financial year are likely to prove challenging to the owners of small-sized enterprises. In an already difficult financial climate and with so many competing pressures leading to a squeeze on company finances, the increase in auto-enrolment employer contributions will only make things harder on small businesses across the UK.

If you need pensions advice for your business contact the specialist pensions team at Plummer Parsons.