By Mark Richdon, below, Tax Director, Bishop Fleming
For many owner-managed businesses, the financial impact of the Autumn Budget may have added an additional complication to what is a challenging outlook. Tax increases and rising employment costs mean many business owners face significant challenges that demand strategic planning and adaptation. Here’s a closer look at the changes and how they are likely to affect businesses moving forward.
Rising employment costs: the triple whammy
For many businesses, the most immediate and pressing concern is the sharp rise in employment costs. The Budget has introduced a range of measures that, combined, put substantial pressure on employers.
From April 2025, the rate of Employers’ National Insurance Contributions (NICs) will increase from 13.8% to 15%. While this may seem like a modest jump, it represents an effective 9% rise in costs. Compounding this, the threshold at which NICs become payable is being slashed from £9,100 to £5,000. This change hits hardest in industries with lower-wage workforces, such as hospitality and healthcare.
Adding to these costs, the National Living Wage (NLW) will increase by 6.7%, raising the hourly rate to £12.21. For a full-time worker on NLW, this equates to nearly £2,270 in additional annual costs per employee.
To ease the burden, the Employment Allowance will double to £10,500, offering some relief to smaller employers. Larger employers though, while benefitting from the removal of the £100,000 cap on the allowance, are unlikely to see a significant offset against the increased expenses.
These rising costs mean businesses need to act now. Reviewing financial forecasts, streamlining operations, and improving workforce productivity through training and performance management will be essential. Salary sacrifice schemes could also help reduce NIC liabilities, but care must be taken to ensure compliance with minimum wage requirements.
Tax increases targeting business owners
Beyond employment costs, the Budget also brought in rises in Capital Gains Tax (CGT) and Inheritance Tax (IHT) which will affect those business owners who are planning for later life.
With effect from 30 October 2024, the lower rate of CGT has been increased from 10% to 18% and higher rate from 20% to 24%. In addition, the £1m Business Asset Disposal Relief (BADR) lifetime allowance is retained, but with an increasing rate from 10% to 14% from April 2025, and then to 18% from April 2026.
This may encourage business owners to reconsider plans for the near future and to exit the business before the BADR rate increases next year. But business owners will need to be wary of attempting to realise a gain that might be caught by anti-forestalling rules in the legislation. Any distribution by a liquidator in a Members’ Voluntary Liquidation would need to be made before 6 April 2025 to obtain the 10% BADR CGT rate, so the disposal must fall into this current tax year.
IHT changes also loom large. From April 2026, Business Property Relief and Agricultural Relief will be capped at £1 million. Above this threshold, only 50% relief will be available, effectively introducing a 20% tax on certain assets where previously none existed.
This raises issues for business owners and farmers as to whether they will have a viable business to pass on to their successors after settling IHT liabilities. IHT relief at only 50% over the £1m cap will potentially create a significant cash flow challenge for family businesses, having to distribute profits out from the business in the form of taxable dividends to be able to fund the IHT payable.
Business owners will now need to review their succession plans to provide the necessary resilience to ensure their business can cope with an increased IHT liability from April 2026.
Practical solutions could include much earlier planning to move assets out of an individual’s estate and spread across the family, as well as the use of trusts and life insurance. The £1m allowance is available for each individual, but is not transferrable on death, so diversifying ownership becomes an important consideration, subject to the impact of CGT (and holdover relief).
A glimmer of relief
Despite the challenging landscape, the Budget does offer some positive news for specific sectors.
Retail, hospitality, and leisure businesses in England will benefit from a 40% relief on business rates for 2025/26, capped at £110,000 per business. Beyond this, from 2026/27, these properties will enjoy permanently lower business rates multipliers, partially offset by increased rates for properties with values exceeding £500,000.
And as expected, there was no change in the rate of corporation tax, and the Budget confirmed that the Annual Investment Allowance will remain at £1m, providing certainty for companies budgeting for tax and investment spending.
And a corporate tax roadmap is welcomed, confirming that the corporation tax rate will remain at 25%, and the existing small profits rate and marginal relief thresholds will be retained. It also confirmed that full expensing relief will be kept, as well as R&D relief and the patent box.
Navigating the challenges ahead
The Autumn Budget has reshaped the financial landscape for owner-managed businesses. Rising costs and increased tax burdens will test the adaptability and strategic thinking of business owners across the country.
The Budget’s certainly underscored the importance of proactive financial management for owner-managed businesses as the rising employment costs and tax liabilities demand a shift in how businesses plan and operate.
To navigate this complex environment, business owners must revisit their budgets and forecasts, streamline operations, and explore innovative ways to enhance workforce efficiency. For those planning an exit or succession, early action is essential to minimise the impact of CGT and IHT changes.
Engaging with financial advisors and exploring available reliefs will be crucial. But while the measures introduced by this Budget present undeniable challenges, they also offer an opportunity for businesses to adapt and build resilience in the face of economic uncertainty.
With careful planning, clear-eyed decision-making, and a focus on long-term sustainability, businesses can weather this storm and emerge stronger on the other side.
