Our Licensed Insolvency Practitioners expect a big rise in insolvencies following the significant increase in employers’ national insurance and the Minimum Wage in the recent budget.
The November 2024 budget introduced several measures that have raised significant concerns from across the business spectrum about the likelihood of an increase in company insolvencies, especially amongst SMEs, from when the measures start in April 2025, this being caused by the simple fact that such businesses will not be able to pay their increased costs. In this article, our Insolvency Practitioners (IPs) look at the key measures and their expected impact and highlight specific concerns from just some of the industry sectors that are likely to be most affected. We conclude by looking at how Insolvency Practitioners can help under pressure businesses navigate their way around these increased costs.
(A version of this article appeared in the Bournemouth Daily Echo – Antony Batty & Company predict rise in BCP insolvencies | Bournemouth Echo).
What are the key areas that the budget increased business costs in?
The three key areas are:
- Increase in Employers’ National Insurance Contributions (NICs)
The budget announced an increase in employers’ NICs from 13.8% to 15%, along with a reduction in the contribution threshold. This means that businesses will face higher payroll costs, which could strain their finances, especially for SMEs operating on tight margins.
- Minimum Wage Increase
The national minimum wage is set to rise from £11.44 to £12.21 per hour for over-21s and from £8.60 to £10 for 18-20 year-olds in April 2025.
- Reduction in Business Rates Relief
The budget also announced the expiration of the 75% discount on business rates, to be replaced by a 40% discount starting April 2025. This change will result in higher operating costs for many businesses, adding additional financial pressures.
All businesses will be affected by these increased costs. However, it is expected that the increased threat of insolvency will be felt amongst SMEs, and especially in labour labour-intensive industries such as hospitality, retail, care homes, construction and leisure, which may struggle more than most to absorb these additional costs.
These are 3 examples of some of the sectors that we are expecting to be impacted
The Social Care and Care Home Sector
Key findings from a recent survey by the Care Provider Alliance showed that the potential impact of the budget measures include:
- 22% are planning to close their businesses entirely.
- 77% will have to draw on reserves.
- 64% will have to make staff redundant.
This survey echoes concerns from other parts of the care industry that some care homes would be put at risk of closure, whilst others will have to reduce their capacity in order to cut costs, at a time when the demand for social care is growing.
The Retail Sector – Hair Salons
Hair salons, where the cost of labour is c.50% of the cost of running the business, are another sector that could be hard hit.
A survey carried out by the British Hair Consortium, an industry group, found c.40% of respondents to the survey said they were considering closing their businesses in the next 12 months as a result of the budget’s measures.
Possible impact on pubs
A survey of 13,000 of its members by the British Institute of Innkeeping (BII) showed that the additional costs of employment and increases in business rates will render 80% of pubs unprofitable, and that as many as 25% of pubs could close in 2025.
The survey also showed that
- 75% of pubs will cut staff hours, and 33% will make staff redundant.
- 40% will reduce opening hours
- 84% of pubs will increase prices to cover the increased costs, with 80% raising prices by at least 10%.
The role of Insolvency Practitioners
Only time will tell how this situation will play out. What we do know is that the November 2024 budget measures will increase the financial pressures on many businesses, especially SMEs in (but not exclusively in) the hospitality, retail, care homes, construction and leisure sectors.
More businesses are likely to become insolvent
Many businesses are already under pressure post-pandemic and as a result of inflationary pressures, so it seems an increase in insolvencies in 2025 is likely. To be sure, accountants and financial professionals will be advising their clients so that they can continue to meet their financial obligations, producing repayment plans and debt solutions as needed, and/or being referred to Insolvency Practitioners.
Restructuring and Insolvency
The real danger is that the extra pressures placed on companies by the latest Government measures could force businesses who are already distressed and dealing with financial problems over the edge and unable to pay their debts, with insolvency looming.
Insolvency Practitioners can play a crucial role in helping businesses and company directors navigate these challenges. They can provide early intervention and advice, help develop restructuring or recovery plans, through a Company Voluntary Arrangement or an Administration and offer guidance on compliance with legal requirements to avoid wrongful trading and other breaches of duty. By working closely with businesses, IPs can help them manage financial distress and potentially avoid insolvency and liquidation, whilst protecting the assets of the company and reducing the possibility of director disqualification.
It is essential for businesses to seek early advice and support from Insolvency Practitioners to navigate these challenges effectively. Contact us at any of our offices for an initial free of charge consultation.
