The Shorthand – support for business energy bills on the horizon

Welcome to this week's edition of The Shorthand, your weekly digest of the top news stories that affect small businesses in the UK! Here we break down the stories, detailing what they’re all about and, more importantly, why you should care.

And all that in under 5 minutes.

1. Energy bill support for businesses is finally announced

What’s happening here?

The UK government has announced a major package of support for businesses paying their energy bills, capping the price that firms will pay for both gas and electricity for six months over the winter.

Under the plans, bills will be capped at 21.1p per KWh for electricity and 7.5p per KWh for gas for a period of six months, a cut of nearly 50% compared to the price that energy was expected to reach this winter.

However, because energy prices were expected to rise so significantly this winter, many small businesses will still end up paying more than they currently do even after the package is introduced.

The government has not announced how much the scheme will cost, though it is expected to be significant given that the Treasury will be paying energy companies for the shortfall in the price of energy that is created by the cap. Martin Young of Investec has estimated that the cost to the taxpayer of the scheme could easily top £25bn, with others suggesting that the figure could be closer to £40bn.

Why should you care?

The spiraling cost of commercial energy tariffs has been a cause for serious concern for businesses since prices started to rise quickly back in spring this year. Unlike households, businesses on commercial energy tariffs have not previously benefited from a price cap and commercial wholesale prices have risen enormously since the start of the Russian invasion of Ukraine back in March.

This package of support represents a lifeline for many small businesses across the UK and may help to stave off the immediate threat of businesses collapsing this winter. Indeed, prior to the announcement, there had been significant concern amongst businesses about the prospect of higher energy prices, with some firms having seen their bills quadruple since early 2021.

There is concern from business groups, however, that despite this package of support being a welcome intervention, it may not be enough to save some small businesses from going under because of their energy bills. Tina McKenzie, Policy and Advocacy Chair at the Federation of Small Businesses (FSB) commented:

Subsidising the unit costs of electricity and gas for six months is welcome, but there are those who miss out from before the six-month period, and help must not result in a cliff-edge afterwards.

2. Interest rates rise and recession looms

What’s happening here?

The Bank of England (BoE) officially raised interest rates on Thursday this week by 0.5 percentage points for the second successive month, leaving interest at 2.25%. While this rate rise is not as large as the 0.75 percentage points anticipated by some analysts, it still brings the interest rate to its highest level since 2008, at the height of the global financial crisis.

Interest rates are expected to raise further, to over 4.5% by the middle of 2023 according to BoE estimates, before slowly falling back to 3% by 2026. In short, these elevated rates are here for the longer-term.

Also, while official figures for GDP growth for the 3rd quarter of 2022 have not been published yet, the Bank has suggested that they believe the country is already in a mild recession, suffering a second successive quarter of negative GDP growth.

Why should you care?

For any business, when the ‘R’ word is said out loud by the BoE, it’s a worrying moment. This signals a contracting economy which is the last thing businesses already struggling to operate with spiraling energy costs and soaring operating overheads need.

With this rise in the rate of interest, smaller businesses are in the firing line and can expect to be exposed to a ‘borrowing costs shock’ within the next year, according to analysis by the Financial Times. While larger businesses can often insulate themselves from exposure to repayment difficulties through fixed borrowing costs, small businesses aren’t so lucky.

The Bank of England expects that 70% of existing small business loans will be exposed to interest rate rises within a year, even if the debt was originally taken on during the pandemic at a fixed rate. This means that swathes of the UK’s small business community can expect to face higher repayment costs for loans over the next year.

3. National Insurance rise, we hardly knew you!

What’s happening here?

The new Chancellor of the Exchequer, Kwasi Kwarteng, has announced that the 1.25 percentage point increase in National Insurance contributions (NICs) that took effect earlier this year, will be reversed on 6th November.

This means that the increase, designed to raise money for the NHS and social care in the wake of the Covid-19 pandemic, will only have been in place for five months out of the intended 12. Furthermore, the Health and Social Care Levy due to come into effect in 2023 has been scrapped. At the time of publication, the government has not indicated precisely where the shortfall in funding will be made up from.

This reversal applies to classes 1, 1a, 1b and 4 of National Insurance, affecting employees, employers and the self-employed.

Why should you care?

Liz Truss is slashing taxes in an attempt to promote economic growth as the nation teeters on the edge of recession. According to government estimates, the reversal of the NIC rise will see 920,000 businesses get a tax reduction of nearly £10,000 in the year ahead.

For small businesses, the reduction in class 1a and 1b NICs from 15.05% back down to 13.8% will save the average firm roughly £3,000 per year, according to analysis from the Daily Telegraph at the time of the initial rise.

The reversal in the rise to National Insurance contributions could save small businesses £3,000 a year.

4. Could the 4-day working week be here to stay?

What’s happening here?

More than 70 organisations began a six-month trial operating a four-day working week with no reduction in salary for their employees back in June and the results of a mid-trial survey suggest that 86% of participants are likely to consider keeping the reduced working schedule once the trial concludes.

A great deal has been written and debated in recent years over the issue of a reduced working week and its relationship to productivity. The results of this mid-trial survey suggest that the UK-based organisations that are taking part are largely positive about the results at this stage.

Indeed, Sharon Platts, chief people officer for Outcomes First Group, commented:

The four-day week pilot has been transformational for us so far. We’ve been delighted to see productivity and output increase.

Why should you care?

As the evidence begins to mount that a reduced working week without a sacrifice in pay has tangible benefits for employee productivity, wellbeing and perception of their workplace, this could begin to signal a wider adoption of the practice across different sectors of the economy and in businesses of different sizes.

One consideration that small business owners will have to take into account is the potentially disproportionate impact of a reduced working week on a business of their size when compared to the effect on a larger, more established organisation. Nicki Russell, MD of the independent non-profit organisation Waterwise commented:

Some weeks are easier than others and things like annual leave can make it harder to fit everything in.