The Budget and what it means for your SME Business

Today's UK budget announcements are not as scary for SME businesses as anticipated, with corporation tax and national insurance rates held, and a move to encourage investment to stimulate the economy. The Financial Market's neutral/marginally positive immediate reaction is a reflection of this.

Nevertheless, SME businesses face stiff challenges in the light of National living wage changes which will increase employment costs, and SME business owners will be hit personally with a 2% increase in dividend rates, and a £2k cap on pension salary sacrifice.

From a wider perspective, the 2025 Growth forecast for the UK by Office for Budget Responsibility (OBR) is upgraded from 1% to 1.5%, and we are looking at around a slightly downgraded 1.5% growth each year to 2029. The Chancellor says she is determined to beat these forecasts.

So, it seems as if the worst case scenario for businesses hasn’t come to pass, but the picture is far from rosy.

And now that the uncertainty is gone, how do we now move forwards?

Let’s start with the positive.

Corporation Tax and Financial Reliefs

• Corporation Tax - The main corporation tax rate remains steady, this does providing stability for business planning, and is the lowest corporation tax rate amongst G7 countries.

• Full Expensing Extended - The government has prolonged the full expensing scheme as a permanent measure for the rest of the current parliament, enabling companies to deduct the cost of qualifying equipment and machinery, which helps lower taxable profits and encourages fresh investment.

• Business Rates Support - Small businesses and those in retail, hospitality, and leisure will benefit from ongoing relief, with the 75% rates discount extended for another year. This is offset by a new business rate increase in tax for larger properties valued over £500k

  
  

Innovation, Investment and Growth

• R&D Tax Credits - The government has made research and development tax credits more accessible for small and medium-sized enterprises.

• Investment Zones -  New investment zones will be created in strategic regions (eg a fourth AI zone in South Wales), offering tax breaks and improved infrastructure to attract fast-growing industries.

• Enterprise Investment Schemes - The chancellor unveiled plans to widen eligibility for enterprise incentives, including expanding the enterprise management incentive and plans to "re-engineer" enterprise investment and venture capital trust (VCT) schemes to apply to companies as they grow

Employment and Skills

• Apprenticeship Funding - More money will be allocated to apprenticeship programmes, helping businesses tackle skill shortages and boosting youth employment opportunities. Small and medium-sized companies will be eligible for 100% free apprenticeship funding (up to the funding band maximum) for workers under the age of 25.

• National Insurance - Employer National Insurance rates remain unchanged, providing consistency for payroll planning.

Sector-Specific Measures

• Green Transition -  Grants and tax incentives are available for companies investing in environmentally friendly technology and sustainability.

SME Business Owners will face the following challenges.

Dividends

• Dividend Tax increases will significantly impact owner-managed businesses where directors take income via dividends. The rate of dividend tax from April next year will increase to 10.75% for the basic rate of tax and to 35.75% for the higher rates of tax

  
  

Employment Costs

• National Living Wage Increase - From 1 April 2026, the National Living Wage will rise by 4.1% to £12.71 per hour for eligible workers aged 21 and over, increasing gross annual earnings of a full-time worker by £900. This adds to employment costs already increased by last year's employer National Insurance rises.

• Pension - Pension salary sacrifice will be capped annually from April 2029 to a £2,000 threshold, above which salary sacrifice contributions will attract national insurance at standard rates. This will be a hit in particular to owner managed businesses.

Employee Ownership Trusts

• Effective immediately, today's Budget (November 26) announced CGT relief on disposals to employee ownership trusts will be reduced from 100 per cent to 50 per cent. An EOT is where a company's shares are held in a trust and until now, a sale to an EOT was free of CGT. This means that an exit option for Business Owners is now less attractive.

Conclusion

The Budget announced today will lead to many SME owners personally facing higher costs due to the combination of higher dividend taxes and pension contribution changes. Employment costs in SME businesses may increase due to the increased national living wage.

However, it could have been much worse.

it could have been much worse

There are real positives, with no increase in corporation tax or national insurance rates, and investment has been encouraged with enhanced enterprise investment schemes,  R&D Tax credit scheme adjustments, expanded investment zones and the Chancellor underlined a message to entrepreneurs "Build here, Britain will back you".

She also gave an unspecified commitment to look at how the tax system can better support entrepreneurs. Other steps in the right direction were taken with business rates support for smaller businesses and the extension of the full expensing scheme, again to encourage investment.

We should now draw a line as the uncertainty is gone, plan ahead with more certainty, and hope for enhanced government support and incentives next time round as the economy improves.

If you'd like to discuss how any of these specific measures might impact your business, please do get in touch, we'd be happy to explore this with you.