How Does the UK Budget 2025 Affect Small Business Owners?

Chancellor Rachel Reeves delivered the UK Budget 2025 on 26 November, bringing a mixed bag of measures for small business owners. Whilst the government has maintained corporation tax at its current level and introduced relief for some sectors, other changes will increase costs for many firms. Understanding these changes is essential for planning ahead and managing cash flow effectively.

National Insurance: Higher Costs Already in Effect

The most significant change affecting small businesses came from the Autumn Budget 2024 and is already in force from April 2025. Employer National Insurance contributions rose from 13.8% to 15%, whilst the threshold at which employers begin paying dropped from £9,100 to £5,000 per employee.

For a typical employee earning £30,000, this means an additional £285 in employer National Insurance annually. The impact scales significantly for businesses with multiple employees, making this one of the most substantial cost increases many small firms will face.

Employment Allowance Provides Some Relief

To offset these increases, the government more than doubled the Employment Allowance from £5,000 to £10,500 annually. Importantly, the previous £100,000 cap has been removed, meaning more businesses can now claim this relief.

The allowance can cover the entire National Insurance bill for smaller businesses. For instance, a business with two employees each earning £25,000 would have an employer NI liability of approximately £6,000, which the Employment Allowance would reduce to zero.

To qualify, businesses must have at least two employees or directors earning above the secondary threshold. Single-director companies where the director is the only employee above the threshold cannot claim. Businesses doing more than 50% of their work in the public sector (except charities) also remain ineligible.

Business Rates: Relief for High Streets

Budget 2025 introduced permanently lower business rates for retail, hospitality and leisure properties from April 2026. Over 750,000 properties will benefit from reduced multipliers, representing nearly £900 million in annual support.

This permanent relief replaces the temporary schemes that have existed for several years. The measure aims to level the playing field between high street businesses and online retailers by funding the cuts through higher rates on properties with large rateable values, such as distribution warehouses.

Additionally, a £4.3 billion transitional relief package will cap increases for businesses hit hardest by the 2026 revaluation. Film studios will maintain their 40% relief for ten years until 2034.

Taking Income: Changes to Dividends and Salary Sacrifice

Many small business owners take income through a combination of salary and dividends to optimise tax efficiency. Budget 2025 introduced changes that will affect this approach.

From April 2026, dividend tax rates will increase by 2 percentage points across the board. The basic rate rises from 8.75% to 10.75%, whilst the higher rate increases from 33.75% to 35.75%. The dividend allowance remains at just £500, meaning most directors receiving dividends will pay more tax.

These increases come on top of dividends already being paid from profits subject to corporation tax at 19% or 25%. For a higher-rate taxpayer receiving £10,000 in dividends above the allowance, the additional cost will be around £200 annually.

Looking further ahead, from April 2029, the government will cap National Insurance relief on salary sacrifice pension contributions at £2,000 per person annually. Contributions above this threshold will attract both employer and employee NICs. This measure aims to address the growing cost of this relief, which was projected to reach £8 billion by 2030-31.

The change will primarily affect higher earners and those with generous workplace pension schemes. Basic rate taxpayers using salary sacrifice will see 74% shielded from the new restrictions.

Corporation Tax and Investment Incentives

Budget 2025 confirmed that corporation tax will remain at 25% for companies with profits over £250,000, and 19% for those with profits under £50,000. The UK continues to have the lowest corporation tax rate in the G7, providing some stability for business planning.

The government introduced several measures to encourage investment and growth:

• UK Listing Relief: A three-year Stamp Duty Reserve Tax exemption for companies listing in the UK
• Enterprise tax incentives: Doubled eligibility criteria to support scaling businesses
• Annual Investment Allowance: Maintained at £1 million
• R&D tax relief: Administrative changes to streamline claims

Small businesses can continue to benefit from the full Annual Investment Allowance, allowing immediate tax relief on qualifying capital expenditure up to £1 million.

Other Measures Affecting Business Owners

Several other changes announced in Budget 2025 will impact small businesses over the coming years:

Property income tax will increase by 2 percentage points from April 2027, affecting landlords operating through limited companies or as individuals. Basic rate property income tax will rise to 22%, higher rate to 42%, and additional rate to 47%.

De minimis customs relief for low-value imports will be abolished, removing the unfair advantage some online retailers have enjoyed. This aims to support UK high street businesses competing with overseas sellers.

Electric vehicle road tax will be introduced from 2028, with a mileage-based levy at 3p per mile for business users. This reflects the government's need to replace declining fuel duty revenues as more vehicles go electric.

ISA allowance changes from April 2027 will see the cash ISA limit reduced to £12,000 for those under 65, whilst stocks and shares ISAs remain at £20,000. This aims to encourage investment in UK businesses.

Income Tax Thresholds Remain Frozen

Personal allowances and higher rate thresholds will continue to be frozen until 2030-31, extended from the previous end date of 2028. Whilst not a direct business tax, this fiscal drag affects how much directors can take as salary before entering higher tax bands.

The personal allowance remains at £12,570, and the higher rate threshold stays at £50,270. Combined with the National Insurance changes, the tax-free amount a director can take has effectively reduced, making tax planning more important than ever.

Planning Ahead for These Changes

With multiple changes taking effect at different times, small business owners need a clear timeline:

• Already in effect (April 2025): Higher employer National Insurance rates and lower threshold; increased Employment Allowance
• April 2026: Dividend tax increases; business rates relief for retail, hospitality and leisure; National Living Wage rises to £12.71
• April 2027: Property income tax increases; cash ISA limit reduced
• 2028: Electric vehicle mileage-based tax
• April 2029: Pension salary sacrifice cap of £2,000

Businesses should review their payroll arrangements now to ensure they're claiming the Employment Allowance if eligible. Understanding National Insurance requirements is crucial for managing increased employment costs.

Directors taking income through dividends may want to consider bringing forward distributions before April 2026, though this should be balanced against cash flow needs and corporation tax timing. Professional advice can help optimise the mix of salary, dividends and pension contributions.

For retail, hospitality and leisure businesses, understanding how the business rates changes will affect your specific property from April 2026 is important for budgeting.

What This Means for Your Business

Budget 2025 presents a balancing act for small business owners. Lower business rates for some sectors provide welcome relief, but higher employment costs are already biting. The increased Employment Allowance helps smaller firms, yet many will still face higher bills overall.

The dividend tax increases from 2026 will affect how business owners extract profits, whilst the corporation tax freeze provides some certainty. Looking at the package as a whole, employment-intensive businesses face the greatest challenges, particularly in sectors like hospitality that operate on thin margins.

Planning and professional advice become more valuable as the tax system grows in complexity. Staying informed about these changes and timing decisions appropriately can help minimise the impact on your business. The government has committed to one major fiscal event per year, providing more predictability for future planning, but the measures announced require careful navigation over the coming years.