SMEs under pressure  Influencing policy with the IoD in an uncertain economic climate

As Surrey’s Ambassador for SME and co-founder of the management consultancy business JMAC, I often find myself and our business community very much at the “coalface” of economic activity in the UK.

For this reason, many clients who work with us in credit and risk management, predictive modelling, decision science, and portfolio management often seek our support to better understand the macro-economic climate. This is of increasing importance given the uncertain business outlook and difficult economic circumstances we are facing.

I have significant experience managing businesses through challenging economic conditions, particularly during the Global Financial Crisis (GFC) as Chief Risk Officer (CRO) of a private equity-funded consumer lending platform in the EU.

Since founding JMAC in 2010, that experience has been built upon by navigating the business through a series of challenging macro-economic periods in the UK and beyond.

For instance, the Eurozone (EZ) crisis period of 2012-2013 was protracted and complex. For JMAC, it created opportunities in portfolio valuations, supporting investment funds and private equity groups with pricing and due diligence for performing and non-performing assets across financial services and banking in the UK, Ireland, and the wider EU. However, the uncertainty from the EZ crisis reduced opportunities in the domestic professional services sector.

Meanwhile, we noted slowdowns specifically in the UK both in the build up to the 2015 General Election (a “coalition of chaos” anyone?), and during the period of uncertainty immediately after the Brexit vote in 2016. The government’s response to COVID-19 clearly had a significant impact on businesses, however, we focus more heavily on the materiality of the fall-out from COVID-19 policy further on in this article.

The aforementioned slowdowns were always succeeded by significant upturns in economic activity, benefitting organisations such as ours. Entrepreneurial businesses like JMAC are well-positioned to capitalize on such periods. Business owners like us excel at seizing multiple opportunities, often through the commitment to working long hours, while balancing complex personal lives and family responsibilities.

Based on our extensive business experience, the current sentiment in our sector mirrors the GFC period and ignoring this would be unwise. For instance, a senior contact in independent consultancy reports that the current climate is more challenging than any since the late 1990s.

Much of the current business sentiment can be traced back to the autumn budget of 2024, and the new administration’s changes to payroll taxes.

Looking back to the post-budget period, much of what we see on the ground today was foreseeable to many of my fellow delegates within the IoD Economic Policy and Trends Forum during our group’s post budget session in November.

Similarly, polling of delegates at the IoD Better Director Series Event at the Royal Holloway (“The financial landscape post-election for SMEs”) in November, gave a clear warning of the potential impact upon UK employment.

At the event, employers indicated that their response to the budget would give rise to a combination of:

• Lower private sector pay rises
• Increased levels of private sector unemployment
• Fewer entry-level and graduate employment opportunities
• A reduction in private sector apprenticeship schemes
• Increased levels of offshoring
• Accelerated use of Artificial Intelligence (AI) and automation

Meanwhile, a handful of delegates indicated an intention to move operations to more friendly jurisdictions overseas or even initiate the sale and / or closure of their businesses.

While it is difficult to entirely validate the accuracy of the hypotheses put forward by our membership back in November, the early indications suggest several of their predictions have indeed come to pass.

For instance, in June of this year the ONS announced that UK job vacancies are now at a 10-year low if one excludes the COVID-19 lockdowns (1).

Meanwhile, while the ONS’s unemployment rate calculation has been questioned for some time due to the limitations of its survey-based approach, non-farm payroll data maintained by the HMRC paints a very sobering picture (2).

As of May 2025, the HMRC reports that payrolls have fallen in absolute terms in all but one month since the change of administration in July 2024, while a net loss of 276,055 jobs has been reported since additional payroll taxes were announced in November 2024. Furthermore, in May alone almost 110K job losses were reported, with new payroll taxes coming into effect in April of this year.

It should be noted that the HMRC measures are subject to revision. However, given the significant levels of additional public sector employment announced by the new administration, the impact upon the private sector is clearly significant and should be of great concern to all. Furthermore, we find the limited reporting of this matter within the legacy media space to be similarly concerning.

Many of our clients, for whom we provide economic commentary for both the UK and Global economy, do benefit from this level of insight. Furthermore, it should be noted that the IoD do make significant representations to His Majesty’s Government on our behalf.

For example, an IoD press release from earlier this year (3) highlighted the concerns of our members around the huge public spending commitments announced since the last election, specifically calling out the absence of any associated attempts to improve public sector productivity. Public sector productivity languishes far below the levels reported prior to the COVID-19 period, with performance trailing far behind the private sector. Meanwhile, the private sector has registered significant productivity gains since that period.

In addition to gains in public sector efficiencies, we ask the new administration to seek out material reform of the UK welfare system. We have long since noted the impact of the previous UK administration’s response to COVID-19 upon the Universal Credit (UC) claimant count, with UC claims doubling from 3m at the start of the March 2020 lockdown to over 6m only 12 months later (4).

While the UC claimant count has increased still further (to ~7.5m at time of writing), much of the increase post COVID-19 has been due to the migration of legacy benefit claimants (such as the Tax Credits scheme, implemented under the New Labour administration) onto the UC framework.

These high-level figures suggest that a significant proportion of the ~3m additional UC claimants onboarded during the COVID-19 period remain on the sidelines of the UK labour market and / or unwilling to take on additional hours. This is unsurprising given the huge disincentives to work encouraged by our welfare system, where a withdrawal rate of 55% for UC combines with a basic tax rate (20%) and employee’s NI rate (8%) to leave those seeking to re-enter the workforce with only 17p for every additional £1 of earnings.

Meanwhile, our concerns about increasing welfare dependency in the UK chime closely with the reform required of the UK’s increasingly long and complex tax code.

One such example is corporation tax, where SMEs with profits between £50K and £250K pay a marginal rate of 26.5%, higher than the 25% marginal rate paid by larger competitors (with profits over £250K). Meanwhile, the self-employed and those in traditional trades continue to face a cliff-edge in the provision of services when obliged to add Value Added Tax (VAT), albeit with a recently announced (and very welcome) increase of the VAT threshold to £90K by the new administration.

Similarly, the personal tax code continues to disincentivise additional hours, promotions, or accelerated career paths due to punitive marginal tax rates at various levels, including:

• Families with primary earners at the higher tax rate (subject to tapering of Child Benefit)
• Individuals with earnings of £100K+ (subject to marginal tax rates of 60%+)
• Families with primary earners at £100K+ (subject to additional loss of childcare funding)
• Additional rate taxpayers (now subject to 45% tax at a reduced level of £125K earnings)

The impact of such policies was laid bare by a recent Freedom of Information request by The Times newspaper in which the HMRC admitted that a significant proportion of taxpayers are now capping earnings immediately below both the 50K and 100K earnings brackets (5). Furthermore, the proportion of taxpayers capping earnings at those brackets was found to have increased materially in recent years.

In addition to the disproportionate impact upon young families, one should also note the impact upon employees subject to graduate loan repayments (for which an additional 9% of salary is deductible), bringing us onto the area of skills, training and employment law.

With the new administration’s new Employment Rights Bill currently working its way through parliament, business owners continue to tell me of their deep concerns about forthcoming changes. While there is still considerable uncertainty over the likely shape of the final bill, many SMEs tell me that focus should instead be upon addressing skills and training shortages in the UK.

In our view, many of the failings in this space can be traced back to the rapid expansion of university education from the 1990s onwards. Unfortunately, the outcomes for recent graduates have not come close to meeting their expectations of enhanced employment opportunities.

Anecdotal evidence we have seen from across the spectrum in the last 12 months is disturbing. The offspring of many of our clients and business contacts are struggling to find graduate roles, despite many being in possession of 2:1 and above qualifications from Russell Group institutions. Furthermore, the recent spike in unsolicited enquiries to JMAC from Oxbridge and / or MSc qualified graduates from STEM backgrounds (many with Internship experience) paints a very troubling picture.

Moreover, data points are now emerging that reinforce this anecdotal evidence:

• 50%+ grads in several UK regions employed in roles not requiring grad qualifications (6)
• Indeed recently reporting year-on-year declines in graduate roles being advertised (7)

Furthermore, we fear that the funding model for this approach is storing up significant future issues for the exchequer. This is underlined by a recent Freedom of Information request (8) made to the Student Loans Company confirming that there are now 10 graduate loan holdings with debts of over £250,000 each, with the largest just shy of £300,000!

We believe that a renewed focus on vocational training and apprenticeships, alongside significant reform of the university education funding mechanism, is urgently needed to ensure greater opportunities are available to our young people in a changing world disrupted by automation and AI.

The decline in vocational training has contributed to skills shortages in the UK workforce, prompting reliance on unprecedented levels of immigration to fill labour gaps since the early 2000s. Recent shifts in public sentiment, with approximately 70% of the public expressing concerns about immigration levels over the past decade (9), highlight the need for a renewed focus on vocational training and apprenticeships. Strengthening these programs is essential to equip young people with the skills needed for a changing economy.

While the outlook appears to be bleak currently, this could change rapidly. Potential upsides include UK personal savings rates (10), which at the end of 2024 increased to a level not seen since Q1 2010 (excluding lockdowns) in the wake of post-election doomsaying and a poorly received autumn budget.

These figures reiterate our view that there remains spare capacity in the UK economy that was snuffed out post-COVID-19, firstly after the Ukraine invasion and inflationary crises of 2022-2023, and secondly in the wake of the 2024 General Election result.

As a proud member of the UK’s SME network, representing 99.8% of all UK businesses, 60% of private sector employment, and 52% of private sector turnover (11), we are ready to respond to the challenges ahead and continue to seek to influence government policy through our growing relationship with the IoD.

Whilst many IoD members will be seasoned business professionals and directors, new entrepreneurial talent entering the membership would benefit greatly from connecting with our ambassador community. The learnings available from such seasoned professionals can help talent to understand how best to navigate businesses during uncertain and turbulent economic times and prepare for future growth.

In the Surrey & Berkshire branch we have a wide range of industry and business specialism represented across our ambassador team. Please do connect with us for insights, support and camaraderie.

References

1. Office for National Statistics. (2025). Jobs and vacancies in the UK: June 2025. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/jobsandvacanciesintheuk/june2025
2. Office for National Statistics. (2025). Real time information statistics reference tables, seasonally adjusted. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours/datasets/realtimeinformationstatisticsreferencetableseasonallyadjusted
3. Institute of Directors. (2025). IoD press release: Increasing public sector productivity must be government’s top priority for the spending review. https://www.iod.com/news/uk-economy/iod-press-release-increasing-public-sector-productivity-must-be-governments-top-priority-for-the-spending-review/
4. Department for Work and Pensions. (2021). People on Universal Credit, monthly statistics. Stat-Xplore.
5. The Times. (2025). On £100k and struggling: Why it’s hard being a HENRY. https://www.thetimes.com/business-money/money/article/on-100k-and-struggling-why-its-hard-being-a-henry-jhzgqqvrn
6. Institute for Fiscal Studies. (2025). Changing geography of jobs. https://ifs.org.uk/publications/changing-geography-jobs
7. City AM. (2025). Graduate job market declines. https://news.uk.cityam.com/story/2342764/content.html
8. The Telegraph. (2025). British graduates with the highest student debt. https://www.telegraph.co.uk/money/jobs/schools-universities/british-graduates-with-the-highest-student-debt/
9. YouGov. (2025). Do Brits think that immigration has been too high or low in the last 10 years? https://yougov.co.uk/topics/politics/trackers/do-brits-think-that-immigration-has-been-too-high-or-low-in-the-last-10-years
10. Office for National Statistics. (2025). UK personal savings rates, time series DGD8. https://www.ons.gov.uk/economy/grossdomesticproductgdp/timeseries/dgd8/ukea
11. Federation of Small Businesses. (2025). UK small business statistics. https://www.fsb.org.uk/media-centre/uk-small-business-statistics

This is a guest article which contains the views of the author and does not necessarily represent the views of the IoD.