How will the new budget impact SME law firms?

My initial thought on the autumn budget was that it was big, but not as big and scary as was expected.

I do agree that tax increases were necessary for the economy, and it was right to raise taxes through a single, broad-base tax. However, regardless of the measures introduced by Chancellor Rachel Reeves in the budget, the Office for Budget Responsibility (OBR)’s prediction for growth is unimpressive in my view, with sub-2% growth anticipated for 2026, 2027 and 2028.

But how will the budget impact SME law firms?

The most significant tax change was the increase in employers’ national insurance contribution (NIC) from 13.8% to 15%, and the reduction in threshold at which it is payable from £9,100 to £5,000 from April 2025. This will directly impact the profitability and cashflow of any employer.

The biggest cost for many legal businesses is their staff, and a 1.2% increase in the current NIC bill could be significant. This is in addition to the £615 increase per employee due to the reduction of the threshold.

It is worth remembering that this increase in NI will also apply to taxable benefits and not just salaries. Firms will now need to decide how to absorb those costs, which can be done via rate increases, reviewing salary and benefits packages or increased productivity.

The positive news is that employers’ pension contributions will continue to be exempt from NIC despite rumours that Reeves was going to change this. Operating a salary sacrifice now means greater savings for employers, due to the increased employers’ NIC rate. Some firms share the saving on employer’s NIC from pension salary sacrifice with their employees, so their employees can also benefit from it.

The legal sector is heavily affected by the basis period reform. From the 2024/25 tax year, all business profits subject to income tax will be assessed on the profits arising in the tax year, no matter of the year-end that the business prepares its accounts to. As firms navigate basis period reform, it will be even more important to accurately calculate tax liabilities for provisional returns as the late payment interest rate will increase by 1.5% from April 2025.

The OBR predicts that the budget policies will push inflation up by 0.5% at their peak, meaning a projected rise to 2.6% in 2025. This will also need to be considered by businesses when preparing their own budgets for the upcoming year.

Many law firms trade in different currencies and exchange differences can be significant. Immediately following the announcements, the pound lost value as markets estimated how much the economy would suffer, though the pound has rebounded a little since then. Markets need to be watched closely as they digest the autumn budget. Many factors affect currency exchange rates; the budget is just one of them. It is important to consider other factors as well, such as the implications of Donald Trump’s victory (this article was written before the US elections).

Finally, in the autumn budget, the government confirmed its commitment to delivering the Making Tax Digital (MTD) initiative by the end of this parliament. Something to watch out for!