Budget 2025 - The Tax Buffet
Did you like the tax buffet...? Let's have a look at whether we have small business feast or famine...
Famine
1. Dividend tax 2% increase from April 2026
Effective next year this reflects governments' obsession with director-shareholders seemingly getting an advantage over employees. Well you're not employees, you're mostly employers - creating jobs. The new rates will be 10.75%, 35.75% and 39.35% - so the top 39.35% stays the same.
Expect your optimum salary-dividend mix to veer towards more salary than before. If you're taking a £12,570 salary and £37,700 dividends, the extra dividend tax will be 2% of (£37,700 - £500) = £744. We will be advising you as always based on your mix of what you need to live on, your other income and your corporation tax rate.
2. Rental property and interest income 2% increase from April 2027
Giving you time to sell your properties and rearrange your investments... The new rates will be 22%, 42% and 47% with property rents receiving the interest relief at 22% as you'd expect.
This is another reason to divest your property if all other changes to date have made your returns pretty marginal. You may still be in property for capital growth, which you might still see if interest rates fall a bit.
3. Increase in income tax and tax returns required as fiscal drag continues to 2030/31
Aside from the fact you're more likely to be a higher rate taxpayer in order to pay your bills, be aware about the tax return part of this which causes a lot of confusion.
As HMRC gets overwhelmed they try to move existing people out of the tax return system and rely on tax codes instead but take care if you're relying on HMRC to get your tax code right. More likely your code will be wrong and you'll get asked to pay a balancing amount you didn't expect through a P800 usually issued in the summer.
4. Electric vehicles mileage charges from April 2028
Despite the encouragement for many years to adopt new technology, EV owners and their companies will now also pay an extra 3p per mile. Let's hope your company can still pay to charge your car without having to identify private and business miles.
5. Capital gains tax relief reduction when selling to Employee Ownership Trusts - immediately?
The reduction will fall from 100% to 50% which seems a bit petty. What is wrong about selling to employees instead of a 3rd party? Perhaps the thinking is that 50% relief is incentive enough.
6. Penalties and interest increases
Penalties for submitting a Corporation Tax return late will double from April 2026 and interest rates on late payment of VAT and IT will increase from April 2027. It's even more essential to help us keep on top of your submissions and tax payments. We're here to help, as always.
7. ISA investment in shares - April 2027
To avoid (if we're still allowed to say that) dividend tax on any other investments coming in at the same time, you may be encouraged to invest in ISAs or to move some cash into shares ISAs. Unless you're 65, you can only invest £12k in cash ISAs making shares ISAs relatively more valuable.
8. Working from home cost claims not available - April 2026
Unless an employer pays an employee for the additional costs of working from home, an employee can't make a claim. This is usually the £6 a week or £312 a year tax saving of between £62 to £140. This looks more like an HMRC time saving change so they don't feel obliged to spend time checking them.
Not to mention increases in the national and living minimum wages and stricter employment law, impacting small employer abilities to take on employees or even keep existing employees. This incentivises the use of AI and automation wherever possible. Thankfully, you'll get 100% tax relief if you do so - see 1. below.
Feast
1. Capital allowances stay the same for most small businesses
Despite the reference to a 40% First Year Allowance and a reduction in the writing down allowance from 18% to 14% it looks as though the £1m 100% relief under the Annual Investment Allowance - AIA - is here to stay which is all that most small businesses need.
2. Employer pension contributions - April 2029
Despite the salary sacrifice restriction to £2k coming in from April 2029, it looks as though the usual employer pension contributions your company make aren't affected.
3. Entrepreneurial relief increases
There was a reference to EMI and EIS threshold increases which will always be welcome, but we've not yet seen the details. EIS increases aren't as useful as SEIS increases for start ups of course.
Please remember that any financial investment decisions require a comprehensive review by an IFA or IFP.