Autumn Budget 2025: What It Means for Small Businesses

The Autumn Budget 2025 follows a challenging period for many small businesses. Ms. Reeves’s previous budget was criticised for increasing employment-related costs, particularly through higher National Insurance and a substantial rise in the National Minimum Wage. While the 2025 Budget does not introduce a new sweeping cost shock, it does not remove the pressures either. Instead the government combines modest support in certain areas with shifts in how business investment and profits will be taxed.

In this context, small businesses and owner-managed firms will need to review strategic plans - including investment, remuneration and profit extraction -  carefully to adapt to changed financial incentives. As well as small businesses, we have also included some information on how individuals will be affected by the budget:

Headline Budget Measures for Small Businesses

• Permanent business-rates relief for retail, hospitality and leisure (benefitting approx. 750,000 premises).
• Revised rules allowing some firms to open a second premises without losing Small Business Rates Relief (for up to 3 years).
• Confirmed increase in the Minimum Wage from April 2026: £12.71/hr for workers aged 21+, lower rates for younger cohorts.
• Changes to pension salary-sacrifice relief coming in 2029.
• Higher dividend tax rates from April 2026.
• Important changes to capital allowances (writing-down allowances and a new first-year allowance).
• No change to VAT registration thresholds; Government signals further consultation on VAT accounting schemes in 2026.
• Continuation of frozen Income Tax and National Insurance thresholds, which increases the likelihood of fiscal drag for business owners paying themselves a salary.

Business Rates: High Street Relief and Growth Incentives

Business-rates reform remains the most tangible area of support. The Budget delivers permanent relief for retail, hospitality and leisure, which will reduce a major fixed cost for many high street and consumer-facing businesses.

Notably, revised rules now allow some small firms to open a second site and retain their Small Business Rates Relief - known as a grace period - for up to 3 years, easing a traditional barrier to expansion. For businesses considering growth or diversification, this adjustment may make second premises a more viable option financially.

That said, outside the retail, hospitality and leisure sectors, the benefit is limited. Businesses in other sectors should not expect similar property-cost relief.

Employment Costs: Minimum Wage and Salary Pressure

The Budget confirms that from April 2026 the National Minimum Wage rates will increase to:

• £12.71 per hour for workers aged 21 and over,
• £10.85 per hour for ages 18–20,
• £8.00 per hour for under 18s and apprentices.

This update builds on earlier increases and continues the upward trend in labour costs. For sectors such as retail, hospitality, care, tourism, cleaning and other labour-intensive businesses, the cumulative effect will be significant, especially when combined with other cost pressures.

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Pension Salary-Sacrifice Relief: Key Changes

The Autumn Budget 2025 confirms that from April 2029, the tax advantages linked to pension salary-sacrifice arrangements will be capped. This affects both employees and owner-managers who currently use sacrifice to reduce Income Tax and National Insurance while building pension savings.

Current (pre-2029) position

• Employees save 8% or 2% NI on sacrificed income.
• Employers save 13.8% NI.
• Higher earners receive 40% or 45% Income Tax relief via sacrifice.
• There is no cap, provided post-sacrifice pay stays above minimum wage.

What changes in 2029

• A new annual cap will limit how much income can be sacrificed with full tax and NI relief.
• Employer and employee NI relief will taper or stop once the cap is exceeded.
• Higher-rate and additional-rate Income Tax relief via sacrifice will be restricted.
• Applies to all employees and owner-directors.

Impact on small businesses

• Reduced NI savings for employers.
• Less scope for end-of-year large director pension contributions.
• More reliance on standard employer pension contributions rather than sacrifice.
• Higher long-term employment and remuneration costs for firms with generous pension schemes.

Capital Allowances & Writing-Down Allowances: What’s Changing?

A key development in Autumn Budget 2025 concerns how businesses can deduct the cost of capital expenditure (plant and machinery, equipment, tools, etc.) - a vital issue for small firms investing in growth or upgrading assets.

What the changes are:

• From 1 January 2026, a new 40% First-Year Allowance (FYA) applies to qualifying main-rate capital expenditure by companies and unincorporated businesses. This applies to new, unused plant and machinery (not second-hand assets or cars).
• From 1 April 2026 (Corporation Tax) / 6 April 2026 (Income Tax), the main Writing-Down Allowance (WDA) rate falls from 18% to 14%. This applies to expenditure not eligible for full expensing or the FYA.
• The standard “full expensing” regime (100% first-year relief on certain qualifying new plant & machinery for companies) remains unchanged.

Implications for Small Businesses:

• The new 40% FYA provides an opportunity for quicker tax relief when investing in new main-rate assets. For eligible firms - for example, those purchasing equipment, machinery or IT hardware - the allowance may improve cash flow and offer immediate offset against profits in the year of purchase.
• However, the reduction in WDA from 18% to 14% slows the rate at which costs of non-qualifying or second-hand assets are written off. Over time, that means higher tax bills (or lower relief) compared with the previous regime.
• Small businesses planning investment, upgrades or asset replacement should therefore carefully consider timing. Where possible, bringing forward capital expenditure to take advantage of the 40% FYA may offer a stronger tax benefit than delaying.
• For owner-managed or unincorporated businesses that purchase plant, machinery or equipment, the mix of FYA and WDA changes will affect profit and cash flow calculations for 2026 onwards.

Owner-Managed Businesses: Dividend Tax, Pension Relief and Profit Extraction

Many owner-managed small businesses combine salary, dividends and pension contributions to optimise remuneration. The Budget makes this more complex:

New rates from April 2026

• 10.75% – Basic rate (currently 8.75%)
• 35.75% – Higher rate (currently 33.75%)
• 39.35% – Additional rate (unchanged from 39.35%)

What this means

• Dividend income becomes more expensive for both basic and higher rate tax payers
• The existing £500 Dividend Allowance (0% tax) remains unchanged
• Basic and higher-rate taxpayers will pay around £200 more tax per £10,000 of dividends (if they have utilised their £500 free dividend allowance already).

·        Many owner-managers may need to review remuneration planning ahead of April 2026. 

VAT, Compliance and Administrative Burden

The Budget leaves VAT registration thresholds unchanged for now, which offers short-term stability for many micro-businesses. However, the Government has indicated it will review VAT accounting schemes - notably the Flat Rate Scheme and Cash Accounting Scheme - during 2026.

Because these schemes are widely used by small businesses to simplify VAT administration and smooth cash flow, any changes could result in increased compliance burden or altered eligibility. Small firms that rely on simplified VAT treatment should monitor developments closely.

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Rental Income and Savings Interest: Higher Tax Rates from 2027

The Budget introduces significant changes to the way rental income and savings interest will be taxed from 6 April 2027. These measures will affect landlords, property investors, and individuals with substantial interest-bearing savings.

Property income is any income from letting land and buildings, whilst Savings Interest is any income a financial institution pays you for depositing with them. All interest received on assets held within ISAs remains entirely tax free.

New tax rates for property (rental) and Interest income

From April 2027, rental and interest savings income will be taxed at newly aligned rates:

• 22% for basic-rate taxpayers (currently 20%)

• 42% for higher-rate taxpayers (currently 40%)

• 47% for additional-rate taxpayers (currently (45%)

This represents an increase compared with the current system, particularly for higher and additional-rate taxpayers whose rental income had previously been taxed in line with general income rates.

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Tourist Tax / Visitor Levy 

The Budget gives local authorities, particularly combined mayoral authorities, the power to consult on and potentially introduce a local visitor levy - often referred to as a “tourist tax.”

This would apply to overnight stays in hotels, short-term lets, holiday accommodation and similar properties.

Key points at this stage:

• It is not yet a national tax and not automatically applied.

• Each local authority will decide whether to introduce it.

• It may affect holiday-let businesses and accommodation providers if introduced in their region.

Further details will follow once local authorities publish consultation papers and formal guidance.

Economic Context and Trading Conditions

Forecasts from the Office for Budget Responsibility (OBR) and other economic commentators point to continued weak growth, sticky inflation and high borrowing costs, which are expected to persist over the next several years.

In this environment, the Autumn Budget avoids dramatic new cost shocks, but it does not alleviate underlying pressures. Many small businesses will still face:

• Rising labour costs,
• Reduced benefit from pension salary-sacrifice arrangements,
• Slower tax relief on capital expenditure (unless they qualify for the new FYA),
• Higher tax on dividend extraction, and
• Ongoing compliance challenges (especially if VAT accounting regimes change).

The business-rates relief for retail, hospitality and leisure is welcome but unlikely to offset all these headwinds.

How Does the Autumn Budget 2025 Affect Individuals?

Several measures will impact individuals and are worth taking into consideration:

• Removal of the two-child benefit cap for eligible families.
• A £150 energy-bill credit for households.
• Freeze on fuel duty and regulated rail fares in 2026.
• A new levy on residential properties valued above £2 million, to take effect April 2028.
• Continued freeze on Income Tax and National Insurance thresholds, increasing effective tax burden over time.

As a result, lower-income households may benefit from modest support, while higher earners, investors and business owners will face increased tax liabilities.

Autumn Budget 2025: Our Overview

The Autumn Budget 2025 presents a mixed picture for small businesses. On one hand, business-rates relief for retail, hospitality and leisure provides tangible support. The new 40% first-year allowance for capital investment offers a timely incentive for businesses considering investment in plant, machinery or equipment.

On the other hand, the reduction in the writing-down allowance rate, rising labour costs, tighter pension-salary subsidy relief and higher dividend taxation combine to tighten operating margins - especially for labour-intensive firms and owner-managed companies drawing profit through dividends.

For small businesses and owner-managers, the Budget underlines the need for careful financial planning, disciplined investment timing and structured remuneration strategy.

If you run a small business and want to understand exactly how these changes affect your finances - Linggard & Thomas are accountants for small businesses that can provide tailored advice and practical planning support.

Feel free to get in touch today to see how we can empower your business to grow through understanding your finances better.

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