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Business owners and the Budget verdict — not all bad

Date: 31 December 2025

6 minute read

As expected, and as inadvertently flagged by the Office for Budget Responsibility, the 2025 Budget included a raft of changes for business owners. From tax hikes to changes to allowances and incentive schemes, there is much to digest.  But here’s the thing, not all that was announced falls on the negative side of the ledger.  There were positive changes too. In short, it was not all bad.

And if you take into account all the various measures that did not make the final cut of the chancellor’s statement - remember all that talk of a wealth tax, the equalisation of capital gains tax (CGT) rates with those of income tax and the scrapping of inheritance tax (IHT) reliefs? -  the Budget was certainly not as bad as it could have been. 

First the negatives

Pensions:

Once again, pensions did not escape unscathed, this time with salary sacrifice taking centre stage. From 6 April 2029, only the first £2,000 of salary sacrifice pension contributions each year will not be charged National Insurance (NI). This comes after measures announced in the previous Budget which will bring IHT charges on most unused pension funds and death benefits within the value of a person's estate from 6 April 2027 onwards. Together, the pension regime is set to become less generous.  And yet, pensions still have plenty to offer.

Putting money into a pension continues to offer significant tax advantages. For example, pension contributions still receive income tax relief at your marginal rate, capped at £60,000. Furthermore, a reduction in salary, irrespective of whether there is a NI saving can help preserve child benefit and, for those with incomes above £100k, help preserve free childcare and the personal allowance. 

Nevertheless, change is coming. So, for those who can vary their salaries, consideration should be given to making use of the time left before the £2,000 annual cap comes into force.

And when the cap does come into force, business owners will have another decision to make, this time on behalf of their employees: do they compensate staff losing the NI saving or do they let employees bear the costs?

Dividends:

Dividend income tax is set to be increased by 2% — the ordinary tax rate on dividend income will rise to 10.75% from 8.75% and the upper rate to 35.75% from 33.75% (the additional rate is unchanged at 39.35%) from 6 April 2026 onwards.  The headline rate of dividend income tax may still be lower than income tax equivalents, but dividends are paid out of profits already subject to corporation tax — 19% for businesses with sub £50,000 profits and 25% for companies with profits over £250,000.  Dividends are effectively taxed twice. With business owners often paying themselves via a combination of salary and dividends, the 2% tax increase may therefore require a rethink of the salary/dividend split as drawing dividends may now only be marginally better than drawing a salary from the business.

Employee ownership trusts:

With immediate effect, CGT relief on disposals made by business owners to employee ownership trusts (EOT) will be halved from 100% to 50%. Previously, sales of company shares to an EOT were free of CGT, making this an attractive option for owners looking to sell their businesses. Alternative disposal strategies may now need to be explored.

Now for the positives

Business property relief:

From 6 April 2026, any unused portion of the cap on assets qualifying for 100% relief can be transferred to a spouse or civil partner.  This follows the prior Budget’s announcement that 100% business property relief (BPR) was to be capped at £1m with a 50% relief applied to amounts above this. The proposed threshold for the 100% rate of BPR was subsequently increased to £2.5m per individual post-Budget in December 2025. Allowing unused amounts of the now £2.5m allowance to be transferred is a positive step, but business owners will need to make provision for this in their wills. Consideration will also need to be given as to how assets are distributed on the first death to avoid the unused allowance being lost.

Enterprise Management Incentives (EMI):

The scope of EMIs, an employee share options scheme that benefits from tax relief, will be significantly widened from 6 April 2026 so more companies will be eligible.  Companies with gross assets of up to £120m will be able to qualify for the scheme, a four-fold increase on the previous £30m limit; the employee number limit is to be doubled to 500; while the total value of outstanding unexercised EMI options is set to double to £6m and the maximum time period for an EMI option will increase to 15 years from 10 years.  The EMI scheme is a useful tool for incentivising and therefore retaining staff.  Any widening in its scope is to be welcomed.

An ever-expanding to-do-list

A mix of positives and negatives for business owners then.  But arguably this misses the point.  What matters more is that further changes, regardless of whether they are deemed to be positive or negative, were made. Coming on top of those announced in the prior Budget, the to-do-list for business owners is getting longer.  More than ever, business owners need a plan.

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