Budget 2025: Any Christmas cheer for the Entrepreneur?

Nichola Ross Martin CTA (Fellow) FCA, Tax Consultant and President of the Chartered Institute of Taxation (CIOT) shares her initial reactions to the 2025 Budget: what’s there for business owners?

Key measures include a three-year freeze in Income Tax allowances and 2% rise in Income Tax for Dividends, Landlords and Savers. There are signs of the development of a strategy for retaining entrepreneurs in the UK but all business owners are under the cosh when it comes to ‘Closing the Tax Gap’.

For expanding businesses, proposals to widen the Enterprise Management Incentive (EMI) share option limits and extend reliefs under the Enterprise Investment Scheme (EMI) and also for Venture Capital Trusts (VCT) seem encouraging.

Budget 2025 has been one to remember. After weeks of ‘sound-boarding’, speculation and rumour, it was the Office for Budget Responsibility (OBR) who managed to steal some of the chancellor’s show by accidently leaking key measures on budget day itself.

When the chancellor, Rachel Reeves finally stood up to give her Budget speech she confirmed she too held the widespread view of the economists: the optimal way to raise taxes is apply measures to the broadest base. She achieved this task by taxing individuals and not corporations and continuing the previous government’s freeze on the Income Tax personal allowance and the National Insurance thresholds as well as Inheritance Tax bands for a further three years.

When it comes to business, about 99.2% of businesses operating in the UK are defined as ‘small’. The definition covers a wide base: a small business is basically any business that is not a large business, i.e. anyone from a sole trader to company and having between zero and 250 employees.

Certain unincorporated small businesses and landlords are being mandated into Making Tax Digital for Income Tax in April 2026. HMRC estimates that small businesses are responsible for at least 60% of the tax gap. The tax gap is the amount of tax that is theoretically not reported and collected. Budget 2025 introduces a large quantity of measures aimed at closing that gap. These are primarily in strengthening HMRC’s powers of enforcement and collection and the rate of certain penalties for non-compliance and late filing.

The launch of HMRC’s new Making Tax Digital for Income Tax manual on Budget Day was accompanied by news of a plan to invest in new technology to provide taxpayers with real time digital prompts for VAT from April 2027 and Corporation Tax from April 2028. Added to these are extra powers around debt collection and powers to tackle fraud under the Construction Industry Scheme as well as plans for HMRC to make better use of interest and card sales data.

Businesses (and their advisers) clearly need to spend the rest of the year getting tax compliance fit and prepare for the change.

There is some good news for the 850,000 businesses who are filing in MTD for the first time this April; they will not face late filing penalties in their first year.

Unincorporated businesses may be tempted to incorporate to avoid MTD. The government realizes this and is introducing a change to Capital Gains Tax (CGT) Incorporation Relief. From 6 April 2026, Incorporation relief must be claimed and is no longer automatic.

When it comes to selling up, many business owners have taken advantage of the tax exemption for CGT on disposal to an Employee Ownership Trust. The Chancellor has decided that this was too generous, the relief is cut to 50% of gains from 26 November 2025. This is probably a good idea: there were signs that businesses that were not suitable for this type of ownership were being sold in this way.

In passing, there are new further anti-avoidance changes for CGT and Corporation Tax that may well affect business owners who make reorganisation their shareholdings pre-sale. In response to HMRC losing several cases before the tribunals, the company share exchange and reconstruction rules are being adjusted to tighten up the tax avoidance main purpose rules from 26 November 2025.

The government has already pledged stability for larger business according to its ‘Corporation Tax roadmap’ published in the summer of 2025. At the 2025 Budget the chancellor confirmed no changes in 2026 to the 25% rate of Corporation Tax and no changes to Research & Development Relief. There are some tweaks to administration rules for larger businesses on transfer pricing.

For capital allowances there is a new 40% First Year Allowance (FYA) and the government will decrease the main rate of writing down allowances by four percentage points to 14%.

For those companies who are considering listing on the London stock exchange, the Chancellor has announced a 3 year exemption for listing from Stamp Duty.

Employers will be disappointed to find that there is no reduction in the rate of Employers National Insurance Contributions (NICs) planned and that both the National Minimum Wage (NMW) and National Living Wage (NLW) increase slightly from next year.

There are one or two measures affecting employees to note: the removal of the tax relief available for non-reimbursed Homeworking Expenses from 6 April 2026. In contrast, another measure exempts from Income Tax and National Insurance the reimbursement of costs for eye tests, home working equipment and flu vaccinations.

The ability of employees to put their salary bonuses into pensions under qualifying salary sacrifice schemes is to be curtailed. Sacrifices over £2,000 will be subject to NICs from 2029/30.

It is also be clarified that image rights payments by an employer to an employee are taxable as employment income from 6 April 2027.

Enterprise Management Incentive (EMI) share option limits are set to double which makes them attractive to large business employers too. Employees will be able to exercise EMI and Company Share Option Plans (CSOP) contracts on a sale on the new Private Intermittent Securities and Capital Exchange System (PISCES) platform as an exercisable event, without losing the tax advantages the schemes offer.

Employers will need to report a new mileage-based charge on battery electric and plug-in hybrid cars from April 2028, and electric vehicles will be subject to exercise duty.

The electrical car grant is to be extended and 100% relief given for expenditure on EV charging points

Entrepreneurial spirits

Many lobby groups have expressed concern about a perceived absence of government strategy in respect of entrepreneurs. These have been mitigated, to an extent, by the publication of a policy paper ‘Entrepreneurship in the UK’, which is accompanied by a “call for Evidence on Tax Support for Entrepreneurs”. These focus on the actions government is taking to ensure tax support is founder-friendly and to support scaling companies and retaining talent in the UK. The latter is an idea strengthened by a further paper invites views on options ‘to reform non-compete clauses in employment contracts.’

In terms of other tax and investment reliefs, the government is also increasing the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investment thresholds and gross assets test to allow investors to follow-on as companies grow beyond the start-up phase. However, the government is reducing the upfront VCT Income Tax relief from 30% to 20%.

Inheritance Tax (IHT)

It had previously been announced at the 2024 Budget that Business Property Relief (BRP) and Agricultural Property Relief (APR) would be restricted to a £1m limit, and the balance charged to IHT at 20%. The Chancellor confirmed that the £1m allowance will now be transferrable between spouses. This is a very welcome relaxation of the rules for family run businesses. All the other main IHT allowances will be frozen for the next three years.

Conclusions

Research shows that businesses of all sizes prefer simplicity when it comes to dealing with their taxes and unfortunately the UK’s tax code continues to expand in both size and complexity. HMRC’s enhanced powers combined by draconian penalty regimes demand to be met with adequate taxpayer safeguards. These are points to be considered when the draft legislation comes under scrutiny. Everyone in business is ‘feeling the pinch’ right now and there is a quid pro quo: the government needs to demonstrate that it’s really in control of public sector spending. I would urge the Chancellor to set her sights on tax reforming measures next time.