In Rachel Reeve’s latest budget announcement, there were several changes made to tax and spending plans. Amongst those changes were several factors that could affect you, and your business. Below we will outline the important updates for business owners to take into consideration for your future financial plans.
Incentives for investment and growth
From April 2026, the maximum annual amount a company can raise as a Venture Capital Trust (VCTs) or Enterprise Investment Scheme (EIS) will increase to £10 million, or £20 million for knowledge intensive companies. The lifetime limit will rise to £24 million, or £40 million for knowledge intensive companies. The gross assets test will also increase to £30 million immediately before the share issue and £35 million immediately after.
For individuals, the annual investment limit into EIS will remain at £1 million, or £2 million for knowledge intensive companies, while the VCT limit is £200,000.
VCT income tax relief has been cut from 30% to 20%. Despite this reduction, VCT investments remain attractive because gains are exempt from Capital Gains Tax. The higher investment limits announced will make these schemes more appealing to those looking to invest in early-stage, higher-risk businesses.
Frozen thresholds
Tax and National Insurance thresholds were frozen until 2028 anyway, but Reeve’s has now extended the frozen thresholds for a further 3 years until 2031. Whilst this extension will not have a direct impact on businesses, they could result in more employees being pushed into paying income tax or pushed into higher tax bands as wages rise. Businesses with employees on minimum wage will be affected most by these changes.
Salary sacrifice cap
Prior to the announcement on 26th November, salary sacrifice pension contributions were a useful tool for lowering a persons Adjusted Net Income (ANI) for several reasons, such as:
- Lowering tax liabilities
- Avoiding the Higher Income Child Benefit Charge (HICBC)
- Tax-free childcare
A popular way of lowering your ANI is by increasing your salary sacrifice pension contributions. Both employers and employees benefit from increased contributions as both parties save on National Insurance Contributions.
Salary sacrifice pension contribution example
With the introduction of a £2,000 cap on salary sacrifice pension contributions, employers and employees will now pay NICs on employee contributions over £2,000 per year from April 2029. For example, and employee earning a salary over £40,000 and contributing 5% through salary sacrifice would now pay NICs on part of their pension contributions. Additionally, employers will be liable to pay national insurance on their contributions over £2,000.
Dividend tax increases
Small businesses with directors that rely on dividends for renumeration will be impacted by the increase on dividends income. With the upcoming increase of 2% to dividend tax rates from April 2026, the new rates are as follows:
- Basic rate from 8.75% to 10.75%
- Higher rate from 33.75% to 35.75%
- Additional rate remains the same at 39.35%
The dividend increases will also impact contractors and investor-led businesses, directly reducing take-home pay. Businesses that reinvest profits through dividends could see net yield reduced, affecting reinvestment and growth strategies.
Employee Ownership Trusts (EOT)
As a business owner you will likely have, or at least have thought about a succession plan. If you were planning an exit via an EOT then you should be aware that tax relief will drop by half, from 100% to 50% with immediate effect. This means an effective Capital Gains Tax (CGT) of 12%.
Important updates for business owners
For small business owners, the long-term effects of the recent budget changes, including increased higher minimum wage and a cap on National Insurance-free salary sacrifice pension contributions could increase cost pressures for SMEs.
Please seek professional advice from one of our advisers before making any financial decisions.
