One in five SMEs cut staff as tax and cost pressures intensify, survey finds

Rising taxes and operating costs forced more than one in five UK small and medium-sized enterprises (SMEs) to make redundancies last year, underlining the growing strain on business owners as financial pressures mount.

A survey commissioned by Rathbones, one of the UK’s largest wealth and asset management groups, found that 21 per cent of SME leaders were compelled to cut staff in response to higher costs and tax burdens. The poll of more than 1,000 founders, owners and senior executives paints a picture of businesses being squeezed at both the corporate and personal level.

Overall rising costs were cited as the biggest threat to business by 70 per cent of respondents, while 58 per cent said rising taxation and regulatory burdens were among their most significant challenges. Business rates and employer national insurance contributions were singled out as particular pressure points.

The survey also highlights how closely intertwined business and personal finances are for many entrepreneurs. More than a quarter of SME leaders said over 25 per cent of their personal wealth is tied up in their business, meaning higher operating costs are increasingly spilling over into household finances.

This strain is being compounded by a rising personal tax burden. Frozen income tax thresholds continue to push business owners into higher tax bands, while cuts to capital gains and dividend allowances, alongside higher CGT and dividend tax rates, are eroding post-tax income. For many SME owners who extract profits via dividends, these changes are forcing a reassessment of long-established financial strategies.

Faye Church, senior financial planning director at Rathbones, said entrepreneurs were facing a “double whammy”.

“We consistently hear from business owner clients that they are determined to grow, hire and contribute to the wider economy,” she said. “But heightened tax pressures are increasingly stifling those ambitions. Entrepreneurs are being squeezed from both sides, higher taxes at the business level and rising personal tax bills, making it extremely difficult to plan, invest and build for the future.”

Church added that for most entrepreneurs the boundary between business and personal finances is thin, making it essential to consider both together in an increasingly complex and unpredictable tax environment.

Despite the pressure, some SMEs are adapting by reshaping their workforce. The research found that 9 per cent have increased their use of freelancers or contractors, while another 9 per cent have shifted towards more part-time or flexible roles to manage costs.

Confidence in government support remains low. Nearly two-thirds (62 per cent) of SME leaders said they believe the government does not understand the needs of entrepreneurs. More than half (51 per cent) said targeted measures such as business rates relief or changes to employer national insurance contributions would directly support growth and investment.

The impact is particularly severe in hospitality. More than 35 per cent of hospitality SMEs reported making redundancies last year, well above the SME average, and 69 per cent said increased taxation or regulation is now one of the biggest threats they face.

The findings come as pandemic-era business rates relief has been scaled back from 75 per cent to 40 per cent and is due to expire entirely in April. While ministers have announced further support for pubs, hospitality groups warn that restaurants, hotels and other venues risk being left out.

“Calls from the hospitality sector for targeted relief highlight the increasingly painful pressures facing these businesses,” Church said. “Without action, the mounting tax and cost burden risks stifling the very growth, innovation and local regeneration the UK economy urgently needs.”

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One in five SMEs cut staff as tax and cost pressures intensify, survey finds