The Federation of Small Businesses (FSB) has warned that more small firms are looking to reduce rather than increase headcount for the first time since the height of the pandemic in 2020.
The UK’s largest business group’s latest Small Business Index (SBI) shows that one in seven have reduced staff numbers in the last three months, with only one in ten hiring more.
The impact on hours of work available to staff is likely to be even more severe, as firms prefer to make reductions in hours rather than reductions in jobs where possible.
The Employment Allowance – the employers’ equivalent to the personal tax allowance –should be increased to £6,500 in the upcoming Spring Budget to help make it more viable for firms to maintain and extend jobs and hours, including to those currently economically inactive and others out of work. This move would also help support businesses afford the increases to the National Living Wage in April.
If employers’ National Insurance Contributions (NICs) stay the same from April 2024, the current £5,000 will only cover three full time employees instead of the four it was originally designed to cover at the National Living Wage (NLW) of £11.44 an hour.
Increasing the Employment Allowance to £6,500 from £5,000 will enable a small employer to hire four staff on the new £11.44 NLW before having to pay the 13.8 per cent jobs tax, as was the case when the allowance was originally designed.
In the years ahead, the Employment Allowance should be linked to the NLW to ensure it keeps up with wage increases.
FSB National Chair Martin McTague said: “The Employment Allowance has been a big success, giving small firms a real shot at creating jobs and making their business thrive. Entrepreneurs are the ones who helped lead us to recovery after the 2008 recession, and we need to be creating a climate where they are encouraged to make a go of it, knowing they’re doing so in a supportive environment.
“Small businesses are overwhelmingly the route into work for those who are currently out of work, and we need to be doing everything we can to support small employers.
“However, without an increase in the Employment Allowance, they will continue to be cornered by a steep climb in staffing costs and associated taxes. This is a drag on growth and adds fuel to the fire of rising expenses, highlighting why an increase in the Employment Allowance is crucial.
“The Employment Allowance was designed to hire four people on NLW without falling into the jobs tax that makes every job more expensive to create and sustain, and to be a solid support for wage policies and job creation. Now, it’s struggling to cover just three members of staff.
“Linking the allowance with the National Living Wage eases the pressure on small firms contending with NLW increases and rising labour costs. This approach strikes a powerful balance, warding off a looming surge in unemployment, empowering employers, and injecting much-needed energy into the economy.”