The Retail Note | Autumn Budget: a triple whammy for retail
This week’s Retail Note reflects on last week’s Autumn Budget – which was desperately disappointing from a retail perspective.
10 minutes to read
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Key Messages
- Autumn Budget very damaging for the retail sector
- Retail #1 private sector employer in the UK
- Highly exposed to NI and minimum wage increases
- Rise in employer NI contributions to cost £2.7bn+
- Minimum wage to increase by +6.7% from April
- Minimum wage increases far outstrip retail sales growth
- Business rate relief reduced from 75% to 40%
- Significant rate rises for many smaller operators
- BRC’s call for a -20% business rate cut unheeded
- “New” multipliers from 2026 likely to see retailers paying more
- Properties with rateable values >£500k likely to see big hikes
- Crackdown on shoplifting widely welcomed
- Repeal of the downgrading of shoplifting offences <£200
- Retail leaders have denounced Budget
- Damaging to retail, but not totally destabilising.
Not as bad as we were to led to believe it would be. Actually, on reflection, pretty bad. But not as bad as the Liz Truss/Kwasi Kwarteng debacle of 2022 (as if that were any sort of yardstick).
That seems to have been the general summation of last week’s Budget. And of course, attention has since switched Stateside, as apparently something bigger was happening over there.
But from a UK retail perspective, the Autumn Budget was brutal, the sector facing a triple whammy of rising cost pressures. But on the positive side, offset by tougher measures to address the current wave of shoplifting that is blighting the nation’s high streets.
So, a government keen to address consumers robbing from shops, but happy to do so themselves?
Whammy #1 – Employer NI Contributions
Of course, this was widely telegraphed ahead of the Budget itself. From the 2025/26 tax year, employer NI contributions will rise from 13.8% to 15%, while the threshold on employee earnings at which NI applies will drop from £9,100 to £5,000. Higher payroll costs to raise £25 billion annually to support public services and economic stability.
The Institute for Fiscal Studies has put this into some sort of meaningful perspective. Employers will have to pay an additional £770 in NICs for each minimum wage worker (annual salary £22k). Or an extra £900 for each employee on median earnings (annual salary £33k).
Obviously, this applies to all businesses, not just retail, and will be a major cost burden to all employers. But retail will be disproportionately affected for the very simple reason that it is one of the highest “people-related” industries in the UK. According to Statista, UK retail workforce stands at 3.46 million people, making it the largest private sector employer and second largest only to the public sector.
Applying the crudest of mathematics, that is an additional tax burden of £2.7bn for retailers as an absolute minimum. But that is, of course, assuming that every retail employee is on minimum wage, which they are not. So, we’d be on pretty safe ground to upgrade this figure considerably to £3bn or even £4bn.
Whammy #2 – Minimum Wage Increases
Increases in minimum wage will also bite the retail sector particularly hard. From April next year, the adult minimum wage will rise from £11.44 per hour to £12.21 per hour, an above-inflation increase of +6.7%. Ironically, this is always pitched by any incumbent government as a good news story. Retailers do not see it the same way, yet are somewhat constrained as to what they can say publicly for fear of accusation of ‘exploiting’ their workforce.
But again, even crude calculations make for stark reading. Applying a +6.7% increase takes the average annual wage figure to ca. £23,500. Apply the raised NI multiplier to that, the £2.7bn minimum quickly becomes £3bn, the ‘safe ground’ assumptions easily £4bn+.
And they are just the knock-on effects, +6.7% is a pretty heft cost hit in itself. Of course, the counter-argument to this (and one perpetuated by every government) is that a higher minimum wage will benefit the consumer, give them more pounds in their pocket and this will ultimately flow back into the retail sector. Effectively, a higher minimum wage is supposedly of benefit to retailers.
Crude mathematics (the order of the day) shoot this argument down pretty conclusively. Over the last 13 years, the minimum wage has increased at an annual average rate of 5.4%. Cumulatively, it has all but doubled (+97%) since 2012. Over the same period, retail sales (exc fuel) have grown at an annual average rate of +3.6%, cumulatively ca. +58%.
In simple terms, staff costs have grown significantly higher than top line growth. QED operating margins come under pressure. QED something has to give. QED more of the same with the latest minimum wage rise.
Whammy #3 – Business Rates
Everyone’s favourite subject. And the whammy that is perhaps hardest to disentangle, certainly in the longer term. But facts before conjecture.
For business rates, there are significant changes to the charging multiplier(s) and reduced relief for eligible retail, hospitality & leisure property. From 1 April 2025, the last year of the 2023 Rating List, the small business multiplier in England will again be frozen at £0.499. The standard multiplier, currently at £0.546 will be increased by the September 2024 CPI rate to £0.555. Those in Greater London, with Rateable Values above £75,000, there will be an additional of 2p for Crossrail, so potentially £0.575.
Retail, hospitality and leisure relief contribution will be reduced from 75% to 40%, with a cash cap at £110,000 from 1 April 2025. For an eligible retailer, publican or hotelier with a rateable value of £100,000 this would mean:
- Gross rates (before any reliefs): £100,000 x 0.555 = £55,500
- RHL Relief Discount (40%): £55,500 x 0.40= -£22,200
- Rates due (after RHL Relief Discount): £33,300
In 2024/25, the 75% relief as a contribution, would have meant a reduced liability of £13,650.
In a nutshell, a massive increase for most eligible businesses.
Beyond that, confusion rather than clarity, which Chancellor Rachel Reeves cryptically dressed up as a positive by talking of “new” multipliers. In documentation released alongside the Budget (‘Transforming Business Rates’), there is also a stated commitment for lower multipliers for retail, hospitality and leisure properties, to reflect the new rateable values for the 2026 revaluation.
By way of brief summary, there will be a significant changes in the charging of business rates from 1 April 2026, under the following bandings:
- Properties under £51,000
- Retail, hospitality and leisure properties between £51,000 and £500,000
- Other properties between £51,000 and £500,000
- Properties over £500,000
But the actual range of multipliers will not be announced until the 2025 Autumn Budget. Until then, we do not yet know the new 2026 rateable values, supplements (e.g. Crossrail, City of London), transitional relief, nor the government’s definition of what constitutes a retail, hospitality and leisure property.
Taking a step back from all the detail, all this seems a very far cry from an in-opposition pledge to scrap business rates altogether. The retail sector’s plea (made through the British Retail Consortium) of a 20% cut in business rates seems to have gone unheeded – conversely, rather than paying less, retailers are probably likely to pay considerably more.
Taking a more forward-looking view, smaller retailers with lower rateable value properties will see some benefit from multiplier adjustment, but in cash terms this will be swallowed up by further winding down of rate relief. So, on balance, they will probably pay more than they are now. Retail properties with higher rateable values will simply get clobbered by a higher multiple. And also pay more.
One positive
Rachel Reeves said the government will “scrap the effective immunity for low-value shoplifting” and will provide “additional funding to crack down on the organised gangs which target retailers and to provide more training to our police officers and retailers to help stop shoplifting in its tracks”.
In essence, this repeals the 2014 legislation that downgraded shoplifting incidents of a value of £200 or less. A welcome step to address an epidemic that reportedly costs the retail sector over £1.8bn annually.
Retailer reaction and wider implications
Aside from the clampdown on shoplifting, the reaction to the Budget from the retail sector has been understandably muted (actually, I’m being kind).
CEO of Sainsbury’s Simon Roberts expressed his frustrations with the new government’s all stick, no carrot approach. Roberts spelled out in no uncertain terms that the government’s decision to hike employer’s contributions to national insurance and lower the threshold when firms pay it, combined with the increase in the minimum wage, would lead to increased prices for consumers – as it would mean a direct cost increase both for Sainsbury’s and its suppliers. “As the Office for Budget Responsibility has said it will feed through into inflation. We’ll do everything we can to mitigate this, but given the margins of the industry - this is a 3% margin industry - there just isn’t the capacity to absorb this level of unexpected cost inflation coming at us as fast as it is”
Roberts said the increase in national insurance payments alone will cost Sainsbury’s an extra £140m when they come into effect next April, an added burden the grocer could do without given it already “pays nearly £1bn of tax a year”. While Roberts didn’t say directly whether the changes in national insurance contributions would lead to the grocer potentially hiring less staff, or even making some redundant, he didn’t rule it out either.
Marks & Spencer’s CEO Stuart Machin echoed many of these sentiments, expecting the “double whammy” to cost the retailer an extra £60m. Presumably, this “double whammy” encompasses the first two outlined in this note and excludes what may come further down the line in terms of business rates. Either way, M&S highlighted the need to find ways of mitigating the hit – “further investment in efficiency initiatives and automation will be needed”.
CEO of Primark owner ABF George Weston spoke of a “disappointing” Budget for UK high streets that will cost fashion giant “tens of millions” of pounds, flagging that the set of tax rises as a result of chancellor Rachel Reeves’ Budget impacts the high street more than other business sectors. “We are particularly hit by the reduction in the threshold because we employ a lot of part-time people,” he told Retail Week. “From younger people who want to work on a Sunday or mums who want to work a few afternoons, these are people who we wouldn’t have been paying national insurance [for] before. “I think this is a set of tax rises that affects the high street more than most other business sectors so we are disappointed by that.”
A triple whammy, but what will the impact be for retail property? For all the pain it will bring, realistically it is not going to cause a bloodbath in either the immediate or medium term. A number of smaller operators and independents may not be able to stomach the sharp reductions in rates relief and may be forced to close, but this will not radically move the needle in high street vacancy rates generally.
Multiple retailers will see some of their more marginal stores now move into unprofitable territory, making more stores at risk than previously. Acquisition programmes are unlikely to be put on ice completely, but may well be scaled back or reappraised until the full effects of rising costs are understood. The rental growth that we were starting to see is now likely to be kept in check, rather than reverse completely.
Retailers, along with most businesses, are likely to review costs and this will inevitably include headcount. Pricing policies will also come more into the frame and the net result could ultimately be inflationary. Unintended by-products that may ultimately become a reality.
The Retail Renaissance will continue and has not been destabilised completely. But it is being sorely and disproportionately tested.