How the 2025 Budget Affects UK Small Businesses: A Complete Guide to the Tax Changes

Running costs are set to increase while available tax reliefs continue to shrink.

Staff Costs Set to Rise Significantly

Starting April 2026, employers face higher payroll expenses as the government implements substantial minimum wage hikes:

• Adult workers (21 and over): Rising from £12.21 to £12.71 hourly – an extra 50p per hour
• Young adults (18-20): Jumping 8.5% to reach £10.85 hourly
• Younger workers and apprentices: Moving from £7.55 to £8.00 hourly

These increases form part of a broader strategy to create a unified adult wage rate across all age groups.

Worth noting: Tax thresholds for National Insurance and Income Tax stay frozen through 2031. With wages climbing naturally, a greater proportion of employee earnings falls into higher tax bands. Your staff will notice smaller take-home pay, potentially triggering demands for wages above the statutory minimum.

The government is introducing dedicated tax bands specifically for property earnings:

• Entry-level property band: 22%
• Mid-tier property band: 42%
• Top-tier property band: 47%

Shareholder Distributions (Effective 6th April 2026)

• Standard dividend band: Rising to 10.75%
• Higher dividend band: Rising to 35.75%

Keep in mind: These rates apply to funds withdrawn following corporation tax payment. The combined burden on company profits paid out as dividends climbs even higher.

Businesses offering salary exchange pension arrangements (where staff trade wages for enhanced pension contributions) will see the associated tax advantages eroded.

Under current rules, neither employer nor employee faces National Insurance charges on amounts directed into additional pension contributions.

Changing April 2029: Both parties become liable for National Insurance on any pension contributions exceeding £2,000 annually.

The business rates system is being restructured to support traditional retail:

• Retail, hospitality and leisure operators occupying premises valued below £500,000 qualify for reduced business rates starting April 2026. Unlike previous measures, this represents a lasting change rather than a temporary discount.
• The funding mechanism? Large-scale logistics facilities and fulfilment centres (the distribution hubs used by major online retailers) face substantially higher charges.
• Businesses expanding into additional premises benefit from a three-year transition period, protecting their existing small business relief.

Three measures significantly affect business investment and succession planning:

The writing down allowance for plant and equipment drops from 18% to 14%. Purchasing vehicles, machinery, or other operational equipment becomes less tax-efficient.

Transferring ownership to staff through an Employee Ownership Trust? The associated relief has been cut by half. Previously untaxed gains now attract tax on 50% of the profit. While still advantageous compared to conventional sales, the benefit is considerably reduced.

Business Asset Disposal Relief climbs from 14% to 18%. Following the earlier jump from 10% to 14% in April 2025, selling your company now carries a notably heavier tax bill.

Mark these critical dates:

• April 2026: Tax relief for home-based working expenses ends (affecting claims for remote employees)
• April 2028: Company electric vehicles become subject to mileage charges (3p per mile for fully electric, 1.5p for plug-in hybrids). Implementation details pending.
• March 2029: The £135 threshold for duty-free imports disappears. This levels the playing field between overseas fast-fashion platforms and domestic retailers.
• April 2029: VAT invoices require electronic submission in a prescribed format. Paper-based invoicing becomes non-compliant – transition to digital accounting now.

Substantial resources are being directed toward revenue collection, with £2.3 billion expected from intensified compliance activity focused specifically on smaller enterprises. Specialist units are being established to identify fraud and non-compliance.

What this means: Maintaining impeccable financial records has never been more critical. Avoid any shortcuts with tax obligations. Our team can review your bookkeeping practices and ensure you’re prepared for potential HMRC scrutiny.

Securing fee protection insurance should be a priority.

Operators of hotels, B&Bs and short-term rentals should note that regional authorities now have powers to implement overnight visitor charges. Implementation will vary by location, but areas adopting such levies may find themselves at a competitive disadvantage against regions that don’t.

These provisions from the 2024 fiscal statement remain relevant:

• Employer National Insurance: Up from 13.8% to 15% (active April 2025)
• NI payment threshold: Lowered from £9,100 to £5,000 yearly
• Employment Allowance: Raised to £10,500 (previously £5,000)
• Capital Gains Tax: Upper rate stands at 24%, lower rate at 18%
• HMRC interest charges: Late payment rate now 8.5% (from April 2025)

1. Recalculate payroll projections incorporating April 2026 wage increases
2. Evaluate your extraction strategy: Given rising dividend taxation, reassess the optimal mix of salary and distributions
3. Audit pension arrangements: Calculate the financial impact of 2029 salary sacrifice changes
4. Verify rates relief qualification: Determine eligibility for the new permanent reliefs available to retail and hospitality
5. Strengthen compliance procedures: With HMRC intensifying SME investigations, robust records are essential
6. Accelerate planned disposals: Complete before BADR increases further in April 2026
7. Begin digital invoicing transition: The 2029 e-invoicing mandate approaches quickly

Operating expenses are climbing, tax advantages are being curtailed, and regulatory requirements are tightening. Plan your finances accordingly.

The pattern emerging from consecutive budgets is unmistakable: increased revenue generation from businesses through higher levies, fewer allowances, and more rigorous enforcement.

No two businesses face identical circumstances. We specialise in analysing how fiscal changes impact individual companies and creating strategies to limit their effect on your bottom line.

Get in touch with us at Accurox for expert support navigating these complex changes.