Tax
Owner Managed Businesses

Leigh Sayliss
December 2025

Before winning the 2024 election, Rachel Reeves told the Times:

 “If I become chancellor, the next Labour government is going to be the most pro-business government this country has ever seen.”

Fast forward to today. After last year’s unexpected hikes to the minimum wage and employer NICs, many owner-managed businesses (OMBs), SMEs and founders were hoping for relief in the Autumn Budget.

In the end, the Chancellor delivered a raft of small tax changes, rather than any big tax increases. But despite no increases in business taxes and a small concession on inheritance tax, it seems that the Budget offered few reasons to be cheerful:

Income Tax: The Slow Burn

There were no changes to headline rates, but the freeze on thresholds has been extended from 2028 to 2031. On paper, that sounds benign. In practice, as wages rise, more employees will drift into higher tax bands, a phenomenon known as fiscal drag. For OMBs, this means employees’ net pay will shrink over time, potentially denting morale and prompting calls for higher pay rises to offset higher tax deductions.

Businesses competing for skilled staff may may find themselves under pressure to offer higher gross salaries or enhanced benefits to remain attractive adding to payroll costs and squeezing margins.

This is not an immediate crisis, but it is a slow-moving challenge that founders should start planning for now.

Looking after your employees

The most tangible impact comes from employment costs and this is mainly bad news.

From April 2026, the National Living Wage will rise to £12.71 per hour for those over 21, while 18–20-year-olds will see an 8.5% increase to £10.85 per hour. For a full-time employee over 21, that equates to an annual salary of £24,784, around £900 more than today.

For sectors with younger workforces, such as hospitality, retail and care this will translate into significant payroll increases.

In the longer term, from April 2029, employers and employees will pay NIC on any pension contributions made via salary sacrifice above £2,000.

This change reduces flexibility in company benefits design and will require careful communication to staff. Employers who have historically passed NIC savings back to employees will need to revisit contracts and consult on changes, adding administrative burden to payroll teams.

A few silver Linings

Not all the news is bad.

The Enterprise management Incentives (EMI) scheme will also become more generous from April 2026.  Although the size of awards that can be given to individuals will not change, the size of company that will be eligible to grant awards, and the total value of awards that can be granted, will increase significantly, opening the door for later-stage and capital-intensive businesses to offer EMI options.

The implications for OMBs are that many scale-ups and later-stage growth businesses that previously failed the EMI tests (due to size or assets) can now qualify.

For founders, EMI options provide their business with a powerful tool to attract and retain talent, giving a critical advantage in a competitive labour market.  EMI options allow companies to reward key employees in the most tax efficient manner without draining valuable cash resources that are better used in growing the business.

Reeves also announced that from April 2026 SMEs will receive free training for apprentices under 25 as part of an £820m “youth guarantee” programme. This removes co-investment costs for some training and presents a major opportunity for SMEs to offset wage increases by investing in skills development. For businesses thinking long-term, apprenticeships could become a cornerstone of talent strategy.

Tax on Dividends and Passive Income

For founders who rely on dividends, or on interest on loans they have made to their businesses, the Budget brings unwelcome news. From April 2026 dividend income will attract an additional 2% tax at both basic and higher rates. A similar 2% surcharge will apply to savings and property income from April 2027.

These changes erode tax efficiency for remuneration and investment returns, meaning OMBs should revisit their tax planning sooner rather than later.

Growth Capital: EIS Up, VCT Down

There is good news for businesses seeking growth funding. From April 2026, the limits for companies to qualify for Enterprise Investment Scheme (EIS) will double, giving scale-ups and later-stage businesses greater access to capital. However, the tax relief on Venture Capital Trusts (VCTs) will fall from 30% to 20%, which may dampen investor appetite for VCTs and redirect capital toward EIS opportunities. Knowledge-intensive businesses such as tech, biotech and R&D-heavy ventures stand to benefit most. SMEs should anticipate stronger demand for EIS-qualifying opportunities and position themselves accordingly.

Succession planning

The Budget announced a modest concession to the changes in inheritance tax rules where businesses are passed on to the next generation.  In the 2024 Autumn Budget, it was announced that, from April 2026, full relief from inheritance tax would only apply to the first £1m of value – above that, inheritance tax would effectively be charged at 20%.  As a modest concession, this Budget announced that the £1m threshold could be passed between spouses and civil partners, potentially doubling the inheritance tax threshold for a family business. 

Instead of passing on a business to family, selling the business to the employees, through an Employee Ownership Trust has been a tax-efficient succession route, offering 100% CGT relief on disposals, That relief is now halved. Sellers will pay CGT on half the gain immediately, with the other half deferred until trustees dispose of the shares.  While EOTs still preserve culture and independence, the financial incentive is weaker, and some founders may now consider private equity or trade sales more seriously.

Business rates: Targeted Support

Finally business rates will be updated from 1 April 2026, to reflect property values since 2023, pushing most bills higher. To soften the blow, the Government announced a £4.3bn support package for retail, hospitality and leisure businesses, including permanently lower business rates multipliers eligible RHL properties with rateable values below £500,000. Over 750,000 properties are expected to benefit, but businesses should check eligibility and factor this into location planning.

Key Takeaways

  • Employment costs are rising
    Minimum wage increases and NIC changes will squeeze margins.
  • Tax efficiency is eroding
    Dividend and passive income taxes increase from 2026–27.
  • Growth opportunities exist
    EIS limits double, EMI expands, and apprenticeships become free for SMEs.
  • Exit strategies need review
    EOTs lose full CGT relief, making PE and trade sales more attractive.
  • Compliance matters
    Frozen tax thresholds and business rate changes require proactive planning.