Two of the drivers are named directly. The state pension triple lock, which the OBR assumes continues in the absence of a stated alternative, takes state pension spending from about 5% of GDP in 2030-31 to roughly 9% by 2075-76 — against about 7% if pensions were uprated with earnings instead. And the shift to net zero erodes motoring revenue: fuel duty falls from 1.6% of GDP in 2030-31 to 0.5% by 2075-76, which is around three quarters of the net-zero-related revenue decline, with electric vehicle excise duty clawing back roughly a quarter of it.

What this report covers

It is a 50-year sustainability projection. The OBR says explicitly that these scenarios should not be read as forecasts, because it is almost certain that future governments will act to prevent them.

The report shows the pressure future Budgets will be written under, with a government looking for revenue for as far ahead as anyone is projecting. That could come through rates, thresholds, allowances or reliefs, and businesses with headroom in their numbers will absorb it more easily.

The practical step is to work out how much headroom your business has today.

How to calculate your margin of safety

Headroom is measured by your margin of safety: how far turnover can fall before you stop making money.

An illustrative set of figures for a small trading company:

  • Turnover: £480,000
  • Gross margin: 45%, so gross profit of £216,000
  • Fixed overheads: £168,000
  • Operating profit: £48,000

Break-even turnover is fixed overheads divided by gross margin percentage: £168,000 ÷ 0.45 = £373,333. The margin of safety is the gap between that and actual turnover, as a percentage of turnover: (£480,000 − £373,333) ÷ £480,000 = 22.2%. Turnover can fall by a fifth before this business is working for nothing.

Suppose overheads such as wages, rates, insurance and software rise 4%. Fixed overheads become £174,720. Break-even moves to £174,720 ÷ 0.45 = £388,267, and the margin of safety falls to 19.1%. A 4% cost increase has removed just over three percentage points of safety and £6,720 of profit, 14% of the operating profit, with no fall in sales.

The effect of one point of margin compared with one point of sales

The same figures show which change adds more profit.

  • One extra percentage point of gross margin on £480,000 of turnover is £4,800 — straight to profit, because no extra cost comes with it. That is 10% of the operating profit from a 1p-in-the-pound price or buying improvement.
  • One extra percent of turnover at the existing 45% margin is £4,800 of sales producing £2,160 of gross profit — less than half as much, and it comes with delivery cost and working capital.

To replace the profit lost from a single point of margin, you need to sell 2.2% more. Our post on how to price for profit works through that in detail.

Tax rates that affect headroom

Two tax rates decide what a marginal pound of profit is worth.

Corporation Tax. The main rate is 25% and the small profits rate is 19% on profits up to £50,000. Between £50,000 and £250,000 marginal relief applies at a fraction of 3/200, which produces an effective marginal rate of 26.5% — higher than the headline main rate. On £150,000 of profit the sum is 25% of £150,000 = £37,500, less marginal relief of (£250,000 − £150,000) × 3/200 = £1,500, giving £36,000, an effective rate of 24%. The next pound of profit is taxed at 26.5p, so if you are planning capital spend or pension contributions, timing them to reduce profit in that band saves the most tax.

Employer National Insurance. Class 1 secondary contributions run at 15% on earnings above a £5,000 secondary threshold, with the Employment Allowance at £10,500. A single £35,000 salary costs (£35,000 − £5,000) × 15% = £4,500 in employer NIC before the allowance. Payroll is the largest fixed overhead in most small companies, which is why a hiring decision moves the break-even figure more than anything else on the list.

Four things to do this quarter

  • Calculate your break-even and margin of safety using the two lines above. It takes about ten minutes with a set of management accounts.
  • Re-run it with overheads 5% higher and gross margin one point lower.
  • Check where your profit sits against the £50,000 and £250,000 Corporation Tax thresholds before your year end. In the marginal band the next pound costs 26.5p.
  • Forecast cash as well as profit for the next 13 weeks. A profitable business can still run out of cash if payments arrive late. Our post on how to read a cashflow forecast covers what to look at.

How we can help

A report saying the fiscal path is unsustainable in nearly every scenario is a reasonable prompt to find out how much headroom you have. Working it out takes about an afternoon.

Our management accounts and business planning services give you current figures every month or quarter, so you can see the effect of a tax or cost change before it reaches your bank balance. If cash is the pressure point rather than profit, cashflow and budgeting is the place to start.

Everything above is business planning. None of it is personal financial advice. Buzz Accounting Ltd is an accountancy practice and is not a regulated financial adviser. Where a question is about your own pension, protection or investments — including anything prompted by what the OBR says about the triple lock — we introduce you to Equity & General, which is authorised and regulated by the Financial Conduct Authority under FCA number 474163, and the regulated advice comes from them.