Budget puts fresh strain on SMEs, business groups say

Business groups and advisers criticised the government's Budget for further straining small and medium-sized companies. Several said the measures would leave employers facing higher costs with little new relief.

Criticism centred on bank tax, wage policy, sector support, energy costs and the lack of incentives for small businesses to adopt artificial intelligence.

Katie Horne, Savings Expert at Flagstone, warned that a higher tax burden on lenders could affect smaller companies through the banking system. She said the risk was not limited to large financial institutions in London.

"The government needs to be careful about treating UK banks as an easy source of additional tax revenue when it is also relying on banks to help drive economic growth. On paper, taxing profitable banks to help support struggling households may look appealing. But the unintended consequences of taxing banks more could be far-reaching for the SME business economy which provides jobs to three in five working UK adults. Banks play a fundamental role in keeping small businesses in business - from lending essential finance to them, to providing them with ways to maximise their cash reserves and manage their cash flow. As Chancellor John Healey has said himself: banks are "hard-wired into the economic fabric".

"Now faced with bigger tax bills, banks could pass on some of the additional cost to business customers through more expensive loans and lower interest rates on deposits. The unintended consequences of bank taxes could extend far beyond the Square Mile; they could reduce the capacity for regional banks and building societies to lend and offer good rates to their local small businesses, reducing these companies' scope to invest in their own growth, jobs, products and services.

"UK businesses have spent the past decade navigating Brexit, the pandemic, inflation and successive energy shocks, and now the scale of the challenge SMEs face is clear: 43% of SMEs doubt they can continue as they are for more than two years if today's financial problems persist; 11% of businesses have considered closing altogether. Against this backdrop, how businesses manage their cash becomes even more important. If borrowing becomes more expensive and returns on deposits come under pressure, making the most of existing cash reserves could give firms more room to absorb rising costs. That could mean keeping enough money accessible to meet day-to-day costs, while ensuring surplus funds are earning interest rather than sitting idle in low-interest accounts."

Her comments reflect concern that measures aimed at the banking sector could feed through into business lending and deposit pricing. That matters for smaller firms, which often rely on overdrafts, loans and cash management products during periods of weak demand and higher input costs.

Theo Chatha, Chief Financial Officer at Bibby Financial Services, said the package did not go far enough for much of the SME economy and that support was too narrowly focused.

"For small businesses up and down the country, this was a bare minimum Budget. Despite pockets of welcome news, much of what they need to thrive has not been delivered. Support for retail, hospitality and leisure businesses is needed. But the UK's SME landscape goes far beyond those sectors. The manufacturers, construction firms, wholesalers, hauliers and service businesses that make up much of the SME economy are still facing a significant tax burden. They have been left on the same rate, overlooked once again.

The rise in the National Living Wage and National Minimum Wage will support those who are struggling with the cost of living, and fair pay matters. But once again, this cost has been shifted onto SMEs. Businesses are still absorbing the 2025 employer National Insurance increase. Now they face yet another rise in the cost of employing people, with nothing in this Budget to help them carry it. The Government wants growth in every postcode. To get it, SMEs need relief on the cost of doing business and more confidence to invest. This Budget has done little to provide either."

The response reflects a wider complaint from smaller employers that labour costs are rising faster than margins across much of the economy. Manufacturers, logistics firms and business services groups argue that they face the same wage pressures as consumer-facing sectors but receive less direct relief.

Energy and AI

Dr Anand Verma, Founder and CEO at ExpectAI, said relief on rates and trading thresholds would not solve broader operating pressures. He pointed to energy costs and infrastructure as unresolved issues for smaller firms.

"Increasing small business rate relief is something that is long overdue. Tripling the trading allowance and introducing the young entrepreneurs allowance ensure that people can finally take the step to run their own business but they have forgotten the costs they will still incur and the inadequate energy infrastructure that continue to be a crucial factor in an SMEs survival rate. This still doesn't favour small business success or those SMEs that are crucial to larger supply chains. It opens doors but doesn't ensure they remain open."

Verma also said the Budget failed to address the practical use of artificial intelligence by smaller companies, suggesting policy attention remains focused on the technology sector rather than adoption across the wider business base.

"A nation that leads on AI security should also lead on putting AI to work. There was nothing today rewarding the use of AI in small businesses to run operations. AI can give a ten-person team the reach of a firm ten times its size. That's how SMEs compete, grow and create jobs. The Budget protects the technology not its use."