At a glance
- Rising minimum wages and National Insurance hikes will increase SME operating costs.
- Higher dividend tax and fiscal drag are set to erode many small business incomes.
- New measures increase compliance work, with mandatory registration for tax advisers.
- Relief comes from an MTD soft landing and apprenticeship levy changes.
The 2025 UK Budget arrived at an unfortunate moment. Figures released after the Budget showed UK businesses had spent the weeks before the Budget cutting jobs at the fastest pace in four years. And the intense speculation leading up to 26 November created uncertainty in both the markets and the business sector.
Reaction since the Budget has been more benign. UK government bonds responded positively with lower gilt yields. UK equities and sterling both also rose marginally.
Much of the political analysis of the Budget has argued that the Budget has reassured backbench Labour MPs, by raising welfare spending and other wealth tax-style policies.
However, few voices from the small business sector have been reassured.
Rising costs and compliance for SMEs
On behalf of its members, the IFA’s reaction statement has expressed “serious concerns about the cumulative impact” of the measures on SMEs, small business owners, directors, and the self-employed.
These Budget measures include mandatory registration for tax advisers to HMRC from May next year, and compliance with “minimum standards”.
For Grant Thornton’s Tim Taylor, rising costs remain the biggest challenge for SMEs. “The proposed national minimum wage and national living wage increases could add around £1,500 and £900, respectively, per full-time employee,” he says.
“Combined with the recent Employer’s National Insurance hike, this puts further pressure on small business owners already battling inflation and high energy bills.”
The National Insurance relief cap on salary sacrifice pensions will also “disproportionately affect SMEs’ ability to retain skilled staff and compete for talent against larger companies,” according to Jerroms’ tax director Kate Moon.
One announcement being widely praised is the extension of Growth and Skills Levy relief from co-investment payments for SMEs who hire apprentices aged 22-24.
Sophie Daykin, of Daykin Scott Accountants, describes this move as a “welcome sweetener” for small businesses, and one that “may make apprenticeships a more attractive option for companies looking to grow talent from within”.
Dividend tax and fiscal drag hit director incomes
More widely, the 2% increase to dividend tax will hit small business owners, raising the personal tax burden on company directors and shareholders reliant on dividends for income.
React Accountancy in Manchester stated that this shift “makes careful planning of director remuneration even more crucial”.
And Rachel Harris of StriveX Accountants says the rise hits small business owners directly. “Their wages are already stretched, and many are paying more this year than expected … Clients will want to understand their salary and dividend planning earlier this year. They will want to revisit pension contributions and compare remuneration scenarios.”
This tax, combined with yet more fiscal drag through continued freezes in income tax, will have effects. The IFA observes that the package “will erode the real incomes of sole traders and small company directors at a time of rising costs and constrained access to finance”.
MTD soft landing offers relief
An announcement generally welcomed was that of the “soft landing” for the first cohort of taxpayers joining Making Tax Digital (MTD)for Income Tax in April 2026. They won’t receive penalty points for late submission of their first four quarterly updates.
Also announced was an expectation that income tax self-assessment taxpayers with PAYE income will pay more liabilities through PAYE from April 2029 (e.g. “timelier” tax payments). A consultation is to follow early next year on how this change might be delivered.
Digital tax expert Caroline Miskin comments that this proposal “sounds like trouble”. She hopes HMRC will “learn lessons from previous ‘timely payments’ proposals, which were unworkable”.
Late filing penalties for corporation tax returns will be doubled for returns from April, while a new penalty regime for late submission and late payment to all self-assessment taxpayers will be applied from 2027.
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