Budget Context: How SME Balance Sheets Signal Tax Capacity | November 2025

Budget Context

With Chancellor Rachel Reeves' budget approaching at the end of November 2025, SMEs face a combination of recent confirmed changes and potential future pressures.

Reporting reality: Companies House accounts are filed up to nine months after a company’s year end, so the April 2025 employer NI rise is only now beginning to appear in the newest filings. As an example, a company with a 31 March 2025 year end is not required to file accounts showing the NI rise until January 2026.

Recent Changes (Already Announced):

• Employer National Insurance change: A 1.2 percentage point increase to 15% from April 2025
• Implication for reading the data: The full effect will phase into filed accounts across late 2025 and through 2026, depending on year ends

Potential Changes (Under Speculation):

• Minimum wage increase: Reports suggest a rise from £12.21 to £12.70 per hour
• Additional tax rises: Possible further changes to address the fiscal gap

Key Question: Our analysis of 2.6 million SME balance sheets focuses on early signals of liquidity and equity movements as the NI change begins to show, and what that could mean if further cost pressures are introduced.

What Balance Sheets Tell Us About Emerging Tax Capacity

Balance sheet data offers near universal coverage and provides early indicators of how SMEs are entering this new cost environment. Because of the filing lag, current signals should be viewed as the start of the trend rather than the end point.

Key Indicators to Watch

Stronger Starting Position

Current ratio guidepost:

>1.5

Higher working capital cushions suggest more flexibility as cost changes feed through.

• Ability to defer capital spending if needed
• Room to absorb margin pressure temporarily
• Lower refinancing risk if credit conditions tighten

Weaker Starting Position

Current ratio guidepost:

<1.2

Tighter liquidity suggests limited capacity to absorb cost increases without active intervention.

• Working capital strain risk
• Potential need for asset sales or refinancing
• Higher sensitivity to demand shocks

SME Balance Sheet Positioning

Our dataset of 2.6 million active SMEs shows how businesses are positioned as the NI change begins to appear in filings.

Firms Entering with Stronger Buffers

Characteristics visible in balance sheets:

• Liquidity: Current ratio above 1.5
• Leverage: Moderate debt relative to equity
• Equity trajectory: Net worth rising year on year
• Asset base: Investment capacity visible in asset growth

Interpretation: These firms appear better placed as the NI change starts to work through reported numbers, but the full impact will only become clear as more 2025 and early 2026 periods are filed.

Firms Entering with Limited Buffers

Characteristics visible in balance sheets:

• Liquidity: Current ratio below 1.2
• Leverage: High debt to equity
• Equity trend: Flat or declining net worth
• Asset profile: Static or shrinking asset base

Interpretation: Early filings suggest these companies have limited room as costs rise. Whether pressures persist will become clearer as additional filings arrive.

Scale: With around 200,000 SMEs already showing distress signals, continued cost increases could raise failure risk among those with the thinnest buffers.

Regional Patterns

Balance sheet metrics vary by nation and region, affecting capacity to adapt as costs change.

Northern Ireland

Median solvency:

1.398

Interpretation: Higher median liquidity indicates relatively stronger cushions as the NI change starts to feed through.

England

Median solvency:

1.312

Interpretation: Lower median liquidity implies a larger share of firms operating with modest buffers at the point the NI change begins to show.

Sectoral Positioning

Sector balance sheet patterns shape how cost changes may interact with operations.

Sectors with More Flexibility

Professional Services:

• Light asset bases and healthier equity ratios
• Working capital headroom relative to fixed costs
• Implication: More options to manage margins as changes phase in

Established Wholesale and Retail:

• Healthy inventory turnover and disciplined payment cycles
• Stronger current ratios in the latest filings
• Implication: Inventory and pricing levers offer adjustment paths

Sectors with Less Flexibility

Capital-intensive Manufacturing:

• Higher fixed asset bases and related debt
• Lower current ratios due to working capital needs
• Implication: Less room to defer essential capex as costs rise

Hospitality and Accommodation:

• Higher leverage linked to property and fit-out
• Tighter day-to-day working capital
• Implication: Early filings suggest sensitivity where both employment costs and demand fluctuate

Layered Cost Pressures and the Reporting Lag

Context: The October 2024 budget NI change from April 2025 is filtering into accounts on a staggered timeline because companies file up to nine months after year end. Early 2025 year ends will surface in late 2025 and early 2026, with later year ends appearing further into 2026.

Emerging Signals Linked to the NI Change

What the newest filings may indicate:

• Liquidity: Where current ratios have dipped in the first wave of filings covering mid to late 2025 periods, this may be an early sign of pressure
• Working capital: Movements around the 1.3 threshold are a useful early watchpoint
• Equity trend: Slower growth or early flattening in equity can indicate margin compression
• Sector lens: Labour-intensive activities are likely to be most sensitive as the change phases in

These are initial readings. A clearer picture will form as more 2025 and early 2026 periods are filed.

Potential Additional Pressures

Scenario: Minimum Wage Increase

Reported potential change: Increase from £12.21 to £12.70 per hour.

How to read balance sheets if implemented:

• For firms already close to a 1.2 current ratio, additional wage pressure could tighten working capital
• Where equity growth is already slowing, a wage step-up can extend margin compression
• Higher leverage increases sensitivity to any reduction in post-cost operating surplus

Scenario: Additional Tax Increases

How to read balance sheets if implemented:

• Profitable companies: Continued equity growth suggests capacity to absorb some change, but watch for deceleration
• Loss-making or break-even companies: Limited direct corporation tax impact, but reduced headroom for recovery if demand softens
• Highly leveraged companies: Lower post-tax profits can pressure debt service, especially where interest cover is tight

Scenario: Income Tax or VAT Changes

What to monitor in the filings if consumer taxes rise:

• Consumer-facing sectors: Retail and hospitality with current ratios below 1.3 may be most exposed if demand eases
• B2B vs B2C mix: Inventory and receivables profiles help infer exposure
• Owner-managed dynamics: Director loans and drawings patterns can affect flexibility

Reading the signal: Combine liquidity thresholds with equity trajectory to identify where early stress could build.

Decision-Making Framework

The Layered Pressure Challenge

SMEs are entering a period where costs may rise in stages while the data arrives in stages too. Interpretation should account for the filing lag and focus on direction rather than single-period outcomes.

• Confirmed: NI change effective April 2025, phasing into filings across late 2025 and 2026
• Potential: Minimum wage changes and other tax measures
• Key insight: Early filings offer first signals. Robust conclusions require cumulative evidence as more periods are filed.

For Lenders

• Track liquidity trend around the 1.3 threshold across sequential filings
• Watch equity growth deceleration as a proxy for margin pressure
• Overlay sector intensity and leverage to prioritise monitoring
• Model sensitivities with staged timing to reflect filing lags

Trigger to watch: Current ratio trending below 1.2 with debt to equity above 2.0 in labour-intensive sectors.

For Investors

• Identify firms that maintain liquidity above 1.5 and continue to grow equity as early signs of resilience
• Screen for fundamentally sound businesses showing temporary pressure that could present opportunities
• Note automation and investment patterns where fixed assets rise relative to labour costs

Opportunity signal: Healthy solvency plus equity growth in sectors where peers show tightening liquidity.

For Policymakers

• Use median solvency and equity trends by region to target support
• Focus working capital schemes where current ratios drift below 1.3
• Monitor recovery rates with attention to firms rebuilding equity but showing tight liquidity

Policy insight: Early indicators can guide where temporary support would prevent avoidable failures while the full effects phase in.

Key Takeaways

1. Filing lag matters: Accounts are filed up to nine months after year end, so the NI change is only beginning to appear in the latest filings.
2. Read direction, not destination: Treat current signals as the start of the trend. Stronger or weaker starting positions will become clearer as more periods arrive.
3. Watch the thresholds: Movements around 1.3 for the current ratio and any slowing in equity growth are early stress indicators.
4. Sector sensitivity differs: Labour-intensive activities are likely to be more exposed as costs rise.
5. Regional cushions vary: Differences in median solvency point to different levels of headroom.

Bottom Line for Decision-Makers

SMEs are at the beginning of a reporting cycle that will reveal the impact of the April 2025 NI change as filings arrive through late 2025 and into 2026. The median current ratio of 1.314 indicates modest liquidity buffers at the outset. As more accounting periods are filed, a clearer picture will emerge of how liquidity, equity and leverage adjust, and how any further wage or tax changes interact with these trends.