Is the cost of employing staff crowding out investment?

The strongest message from clients was about the cost of being an employer. Increases to employers’ national insurance contributions (NIC) has hit businesses hard and shaped employment strategies.

Clients told us that this and previous governments have “continually layered disincentives on companies”, and that they “need something back to see companies invest again”. The findings correlate with those of a recent survey by the Association of Practising Accountants, of which AAB and Kreston Reeves are members, which found that businesses needed more support from government.

The link between employment costs and investment matters. For a business turning over £5m to £50m, payroll is often the largest cost. When it rises faster than revenue, the money comes out of the budget for new equipment, new markets and new hires.

While the government has recommitted to holding the rates of income tax, NIC and VAT paid by individuals, it has not ruled out other business tax rises. The Chancellor’s proposed plan to cut the burden of regulation by a quarter may be the more realistic, if scant, source of help.

Exits under a cloud

Equally concerning business owners is the continued uncertainty around the tax position for founders and business owners on exits. Changes to inheritance tax (IHT), pensions, together with possible changes to capital gains tax (CGT), is understandably troubling for business owners.

CGT is once again the subject of pre-Budget speculation. Nobody outside the Treasury knows if CGT rates will rise, but owners are planning as if it might. It is too late to get ahead of this Budget – a sale takes many months, and the 2024 Budget saw some businesses caught short when the CGT rates changed from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher or additional rate taxpayers on Budget Day itself.

In addition, since that date, Business Asset Disposal Relief rates have risen over 2 years from 10% to 18% so there seems to be some concern among businesses that this could be a potential target for further increases.

Some owners are accelerating exit plans for the next year or two. Others are pricing expected tax into valuations, raising the asking price so they still walk away with the figure they had in mind. Whether the market accepts that is another matter. Buyers value a business on its earnings and have little reason to cover the seller’s tax bill. If sellers push prices up and buyers hold firm, deals could take longer and investor appetite could slow.

On the subject of CGT, an FT report published on 13 October suggested that the Chancellor was not expected to match CGT levels to income tax following speculation that this could happen. Of course, we will need to await the Budget before we know for sure.

What can business owners do now?

Business owners speculate, but that is often a poor basis for a decision. The useful work before the late October Budget is to model how different outcomes could change the tax profile of your business. However, waiting to find out the finer detail and working with facts could be a better use of time.

If you would like to understand what the Budget means for your business, please join our Autumn Budget 2026 question time webinar, which takes place on Friday 30 October at 9.30am. Register your free place here.