Jobs, pay and prospects all at risk unless the Chancellor acts, small firms warn.

Personal tax cuts will be meaningless unless the Chancellor also announces measures to bring the economy out of its slump, the Federation of Small Businesses (FSB) has warned.

The UK's largest business group has written to Jeremy Hunt ahead of the next Spring Budget, calling for it to include measures to sustain jobs and hours by increasing the Employment Allowance which would make creating and retaining jobs more affordable, and to free more businesses to grow by raising the VAT threshold.

The call unfolds against a backdrop of low business confidence, with the latest Small Business Index (SBI) falling back to -15.0 points in Q4 2023, down from -8.0 in Q3.

There is a long way to go until we reach hoped-for peaks, and a shake-up is urgently needed to unlock real progress in an otherwise lethargic economy.

FSB is calling on the upcoming Budget to:

• Uprate the Employment Allowance to £6,500: Its figures show that for the first time since the height of the pandemic, more small firms expect to reduce employee numbers than increase them in the next quarter, with labour costs being cited as a cost pressure by 46% of firms. At its introduction and subsequent upratings, the Employment Allowance was set to a level where a firm would be able to employ four people on the National Living Wage (NLW). The allowance should be increased from its current £5,000 to £6,500 from April, and then should increase automatically in line with the NLW.
• Raise the VAT threshold from £85,000 to £100,000: In FSB's recent paper into VAT, 38% of firms earning between £75,000 to £100,000 call the current threshold a 'barrier to growth', proving that there is significant untapped economic potential if the threshold increases. Introducing a smoothing mechanism could avoid firms bunching beneath the new threshold.
• Extend the Business Energy Advice Service Pilot to a national scheme: Small businesses are still feeling the pinch of extortionate energy costs, with many still stuck in the contracts they negotiated at the peak of the energy crisis. FSB was pleased to work with the Government on the development of the Business Energy Advice Service pilot in the West Midlands, and this should now be expanded nationally.
• Introduce tax-free shopping: If the UK were to become the only country in Europe to offer tax-free shopping to all overseas visitors, it could create a market that could be worth an additional £10billion annual spend on shopping, hotels, restaurants, travel and leisure.
• Extend the Recovery Loan Scheme: The extension of the Recovery Loan Scheme in 2022 was crucial in helping small firms invest and grow. It should now be extended beyond its current end date, in July 2024. It is performing well and an important feature of the UK's funding ecosystem and brings many benefits in the case of economic slowdown.

FSB national chair Martin McTague said: "Our economy is stuck in a rut and in this Spring Budget, we need measures to move beyond that. Any personal tax cuts will need to be backed by measures to help small firms sustain jobs and hours, and to grow.

"This Budget should be about balancing the scales - raising living standards for those who need it the most and securing a strong, economic future in the wake of a turbulent economic climate

"Employment costs have increased and without a rise in the Employment Allowance, jobs and hours will be at risk, with small firms forced to make tough decisions about the future of their workforce. Adjusting the allowance to align with the National Living Wage (NLW) will also allow business owners to focus on expansion, something that will do wonders for the economy.

"VAT remains a giant headache, and the current threshold stifles firms who want to grow but instead, purposely teeter below it to avoid extra costs. Some are forced to close when they hit £85,000 because it's simply not worth their while to stay open. Simply raising the threshold from £85,000 to £100,000 could unshackle the potential of business growth across the economy. Incentivising entrepreneurs to grow their business in this climate should be top priority.

"Action on the Employment Allowance and VAT are key but there are other measures that would have a significant positive impact - expanding the Business Energy Advice Pilot to a national scheme, introducing tax-free shopping, and extending the Recovery Loan Scheme could also have untold benefits on our economy."