Budget 2025 – Initial Thoughts & Reaction
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The rollercoaster continues!
Yesterday’s Budget announcement gave the clearest message that we’re facing (possibly!) another 5 years of the tax landscape becoming increasingly tighter.
Despite the speculation in the last few months making most of the announcements a formality, there were still some surprises and some points where changes could have been implemented, but haven’t at this stage.
Here are the key points that will affect most small and medium-sized businesses.
This is by far the biggest announcement.
The personal allowance and income tax thresholds (the point where the basic rate, higher rate and additional rate start and end) were frozen in 2020/21 and were due to be frozen until 2027/28. The Budget keeps those thresholds in place for a further three years to 2030/31.
By 2031, the thresholds will have been frozen for 10 years. The impact of that is to drag more people into tax and drag more people into higher rates of tax.
In 2021, higher rate tax kicked in at £50,270 (the same as it does today), and given where inflation has been over the last few years, realistically, that figure should be around £61.5k. So for someone earning £61.5k, they have now brought over £11k into higher rate tax, paying an extra 20% on that £11k, resulting in £2,200 more tax! Every year! And with the continued impact of inflation, this means that any future increases to that income over time will result in a proportionally higher rate of taxation.
By 2031, it is predicted that the median income in the UK will be at the higher rate threshold. When I qualified in 2002, 10.5% of taxpayers were higher rate taxpayers (when the higher rate tax band was £30k – interestingly, if the higher rate threshold had followed inflation over the last 23 years, it would be £62.k). This now stands at 20.7% and is forecast to be over 25% in 2031.
Even if the thresholds start to increase with inflation from 2031, this baseline has been set, and the impact of a 10-year threshold freeze will continue to be felt indefinitely unless there is a complete reform of the allowances and thresholds.
There will be an increase in tax rates on these income sources by 2% for the basic rate and higher rate (but strangely not the additional rate for dividends).
The increase in dividend tax rates will come in from April 2026.
The increase in savings & property tax rates will come in from April 2027.
It’s a seemingly minor increase on the face of it for dividends but it does bring up some fairly major changes.
Taking the tax rate on basic rate dividends from 8.75% to 10.75% is a 22.9% relative increase in that rate! And even taking higher rate dividends from 33.75% to 33.75% is a relative 5.9% increase in that rate.
There has been a narrowing of the benefits of extracting profit via a small salary, with the rest as dividends, versus a 100% salary for some years now. The big question this rate increase gives rise to is, “Is a small salary/dividends still the most tax-efficient route?” And the short answer is that it depends! Profit levels, the interaction of employers’ NI, extraction levels, etc., will all mean that this needs to be reviewed on an individual basis, and we’ll need to review the year-end tax planning for 2025/26 to see what the best route forward is for each client.
Salary sacrifice for pension contributions will be capped at £2k from April 2029.
At the moment, there is no cap where pension contributions are made via salary sacrifice, and as such, there is full income tax and NI relief on all contributions made in this way.
From April 2029, there will be employee’s and employer’s NI on contributions exceeding £2k.
The devil will be in the details as to what the definition of salary sacrifice actually means. Will the pension contributions be considered as “a part of the overall package”? In which case, will all company contributions be subject to this?
From the 1st of April 2026, the NLW & NMW will increase as follows:
This will naturally put pressure on labour-intensive industries (such as hospitality & retail) and, across the board, will put pressure on workforce-wide increases, as the minimum wage creates a domino effect and pressure to increase all wages.
The amount that can be saved in a cash ISA will reduce from £20k pa to £12k pa from April 2027.
The ISA allowance of £20k will be preserved for stocks & shares ISAs.
The new rules will only apply to new investments made from April 2027 and do not apply to existing investments made up to that date.
The rules will not apply to people over 65.
From January 2026, a new 40% first-year allowance pool will be introduced. This will assist unincorporated businesses (so includes private landlords) and limited businesses to claim capital allowances on assets that are leased back to the end user.
Writing down allowances on the main pool are being reduced from 18% to 14% from April 2026 – meaning it’ll take longer to get full tax relief where we haven’t been able to take advantage of the AIA.
Most businesses will be unaffected by the two changes, as the Annual Investment Allowance (AIA) of £1m is kept in place.
There has been an extension to the 100% relief for zero-emission vehicles until the end of the 2026/27 tax year. It is widely expected that this will mark the point where the generous tax reliefs on EVs will start to be withdrawn.
From April 2029, VAT-registered businesses will be required to issue e-invoices for all sales. HMRC will be in consultation with the main software providers to establish how this will look in practice.
The link to VAT registration gives rise to speculation that the VAT threshold may be subject to a reduction. It was rumoured that this Budget would reduce the VAT threshold to line up with the MTD rules coming in from April 2026 (£50k in April 26, £30k in April 27 and £20k in Apr 28), but whilst this didn’t happen, it is something to be potentially aware of in the future.
The Government are also looking at in-year tax payments for non-PAYE taxpayers from April 2029 and will publish a consultation in early 2026 on delivering this change.
Let’s be honest – it will never be called this – in reality, this will be referred to as “The Mansion Tax”.
For properties over £2m in value, there will be an annual charge of £2,500, rising to £7.5k for properties valued over £5m.
From April 2028, there will be a new mileage charge as follows:
We’ve summarised the key points in this newsletter – please feel free to share this with anyone you think may find it useful.
And if you got this far, well done! It’s not an easy read, and it’s disappointing to have to deliver something where the tide feels like it is only moving in one direction!
One day, hopefully not too far away, it’ll be a delight to be able to inform you that something is working in your favour, but in the meantime, be assured that we’ll be doing everything we can to best work with the system we’ve got.
If you have any questions about this year’s Budget please feel free to get in touch.
