Business tax
Rachel Parker
Partner
With last year’s Corporation Tax (CT) Roadmap already in place, it was no surprise that, aside from areas under active consultation, the Budget brought little in the way of new CT policy. The main rate of corporation tax remains at 25%, keeping the UK in the middle of the pack among G20 nations.
Continuing the Roadmap’s commitment to encourage investment, from a capital allowances perspective, there were no changes to full expensing or the £1 million annual investment allowance. There was, in fact, a pleasant surprise for the leasing industry, effective from January 2026, with a first year allowance (FYA) of 40% for purchasing new assets for leasing and hiring out. This FYA is a trade-off for the reduction in the writing down allowance from 18% to 14% per annum (from April 2026) for main pool items, which is forecast to give HM Treasury a net receipt each year.
In a similar vein, the R&D regime, another of the UK’s key investment incentives, remains largely untouched. It was confirmed that all SMEs will be within an advanced clearance process for R&D claims as part of a pilot starting in Spring 2026, providing greater certainty upfront on whether innovative projects will qualify for relief and which party will be able to claim relief for contracted-out expenditure.
Transfer pricing legislation has been amended (as expected), with a key change exempting certain domestic transactions where no tax loss risk exists. While it was widely anticipated that the exemption from transfer pricing for medium-sized enterprises would be removed, following the outcome of the consultation, the Government has decided to maintain the existing exemption in the UK legislation.
As was also expected, the Diverted Profits Tax is repealed, to be replaced by a simpler CT provision for unassessed transfer pricing profits, effective from 1 January 2026. It was also confirmed that a new International Controlled Transaction Schedule (ICTS) filing requirement will begin for periods starting on or after 1 January 2027. Following the promised review, Digital Services Tax will remain, for now, in lieu of a multi-national permanent solution.
For the very largest investments, HMRC will launch a new Advance Tax Certainty service in July 2026, for projects with a value of at least £1 billion, but clearances will not cover transfer pricing, asset valuations, or matters involving other fiscal authorities which remain under a different arrangement.
The Government also outlined the next steps in its promised overhaul of the business rates system in England. As expected, there will be winners and losers: more permanent relief for retail, hospitality and leisure has been introduced, though the trade-off is that other businesses will see increased business rates with the Government introducing a higher rate on the most valuable properties.
While this Budget brought no changes to income tax or National Insurance contribution (NIC) rates, the freeze on income tax and some NIC thresholds as well as to the personal allowance is to continue until April 2031, increasing fiscal drag and pushing more employees into higher tax bands.
As trailed, the Government has announced a restriction on employee pension contributions affecting all employers who offer pension salary sacrifice. This change will lead to further complexity and additional costs for employers who have adopted pension salary sacrifice from 6 April 2029.
There will be a cap of £2,000 per year on salary-sacrifice pension contributions exempt from National Insurance (NI). Contributions above this threshold will attract employer NI (currently 15%) and employee NIC at standard rates (currently 8% or 2% depending on earnings). Employers will need to review their approach to pension salary sacrifice arrangements, including those who choose to share employer NIC savings through enhancements to contributions. There will be knock-on effects for those who offer the ability for employees to waive bonuses into pensions.
Employer contributions outside of salary sacrifice are expected to be unaffected. Many employers choose to pass on some or all of their employer NIC savings through enhanced pension contributions, and this approach may need to be reviewed, which could negatively impact the approach to pension savings. Employers should also consider other employer -provided benefits that may potentially offset the impact of lower pension contributions.
The Government has confirmed a pragmatic approach to the application of income tax and NIC relief on reimbursements for specific workplace benefits. While this was routinely assumed by employers, the reassurance will be welcome, particularly given increased scrutiny from HMRC on costs such as eye tests, flu vaccines and home working equipment. This will apply from 6 April 2026 and is hoped to open the door to the adoption of similar positions in the future in relation to the provision of other trivial benefits.
The Government re-confirmed its commitment to introduce mandatory real-time reporting of benefits in kind from April 2027, requiring employers to report Income Tax and Class 1A NIC through payroll software in real time, moving away from annual P11D reporting after the year end.
While this change is not set to apply until April 2027, there will be significant disruption to many business-as-usual processes, affecting multiple stakeholders. Employers are urged to take action in advance and consider registering to voluntary payroll benefits in kind from an earlier tax year.
There has been a significant amount of pre-Budget speculation, including the potential for material tax reform for individuals in areas such as wealth taxes and exit charges for individuals leaving the UK. However, today’s announcements were largely in line with the most recent speculation but with a few surprises.
One announcement we were expecting was the freezing of income tax and national insurance rates and allowances for another three years, which represents a real-time increase in tax, impacting many taxpayers as wages rise and a higher proportion of people fall into the higher rates of tax.
2% income tax increases were also introduced for dividend income from 6 April 2026, along with savings income and property income from April 2027. Interestingly, the increase for income tax on dividends has not been applied to the additional rate of tax, only the basic rate and higher rates, whereas the increase for savings and property income applies across all tax bandings. This increase in income tax represents a clear manifesto breach while allowing the Government to say that it will not affect working people (provided they do not have savings or investments!).
The much-anticipated ‘mansion tax’ was announced in the form of a council tax surcharge applying to properties worth over £2 million from 2028/29.
In the same way income tax rates have been frozen, the inheritance tax nil rate band will also be maintained at its current level of £325,000 until 2031. While we welcome the decision to make the £1 million 100% Business Property Relief and Agricultural Property Relief inheritance tax bandings transferrable between spouses, our clients remain very concerned about the significant impact of the restriction to these reliefs announced in the previous Autumn Budget and which comes into effect from 6 April 2026.
Alongside these headline changes we have seen various, more specific policy changes, largely focused on non-residents or previously non-domiciled individuals and associated trusts. There was also an extension of certain anti-avoidance provisions which have the potential to apply to shareholders on a reorganisation of companies they own.
A key concern going forward, given the significant areas of speculation leading up to the Autumn Budget, is whether this is the end with regard to personal and wealth tax changes or whether the broader shoulders have more to carry.
While the headline rates of VAT and the VAT registration threshold remain untouched by the Chancellor, there have been several other significant announcements related to VAT and customs duty in today’s Budget.
In addition to the Government’s plans to require all VAT invoices to be issued electronically from April 2029, the Chancellor has also confirmed the removal of the £135 low-value consignment threshold for customs duty relief on UK imports, aiming to create a level playing field between domestic and overseas sellers. This mirrors a recent EU decision to abolish customs duty relief on low-value imports from non-EU countries starting in 2026. The UK plans to introduce the change “by March 2029”. For affected businesses, this change means customs duties will be calculated and paid on all parcels, regardless of value. The shift will increase administrative complexity for e-commerce platforms and sellers and may require appointing customs brokers in the UK.
The Government has also published the outcome of its long-running consultation on the VAT treatment of private hire vehicles, deciding not to press ahead with a proposal to create a special margin scheme for accounting for VAT on taxi fares. However, it will legislate to block private hire firms from using the existing tour operators' margin scheme for travel businesses from 2026. This means that taxi fares will remain subject to VAT at the standard rate of 20%, and that operators must continue to navigate complex VAT rules concerning whether the driver or the private hire business provides the service to customers.
Finally, HMRC has changed its policy on international VAT groups with immediate effect. It explains that overseas establishment of a business VAT grouped in the UK should be treated as part of that VAT group, and that transactions made between the UK and overseas establishments of the same VAT group can be disregarded. Where businesses have accounted for these transactions using the reverse charge and have been unable to recover all the input tax, HMRC is inviting error corrections.
This year’s Budget wasn’t as eventful for London’s capital markets as early speculation had indicated it might be. However, the level of speculation and uncertainty in the run-up had an unsettling impact on UK equities and bond markets. In the end, there was a positive statement of support for UK equity markets with the removal of stamp duty on share trading following an IPO for three years. This will only affect Main Market IPOs, as AIM has been exempt from stamp duty as a growth market for a number of years. The value of stamp duty to the Treasury was recently highlighted by a FTSE 100 company’s decision to move its direct listing to New York, which took the trading in the securities in London outside of stamp duty. That situation also highlighted the ability of companies to effectively circumvent stamp duty, so the move by the Chancellor is a much-needed act of support for London IPOs.
It's not going to be an end of calls for the abolition of stamp duty altogether, which is seen as an impediment to listings and liquidity.
Following last year’s changes to Business Property Relief (BPR), there was a steady flow of companies transferring from AIM to the Main Market as the tax-advantageous nature of AIM was eroded. These changes were seen to be detrimental, as IHT funds were reduced. So, this year’s announcement of changes to VCT and EIS eligibility, and the raising of the lifetime company investment limit to £24 million (and £40 million for knowledge-intensive companies), were particularly welcome. VCT and EIS funding are a cornerstone of new capital for AIM companies, and increasing the available funding will be particularly beneficial for the AIM market.
Given the rise in income tax rates on dividends and savings, the use of ISAs has even more importance for personal finances. There was also considerable speculation whether cash ISAs would be restricted in this Budget. With the need to stimulate an investing and growth-focused culture as a backdrop, there was significant debate whether there should be tax incentives for keeping savings in cash. The restriction of cash ISAs to £12,000 (for the under 65s) indicates a move towards an investments focus for ISAs. The behaviour shift that will follow this Budget is unknown; however, the stock market is the expected beneficiary as savings are directed from cash ISAs to stocks and shares ISAs.
Entrepreneurs
Tim Taylor
Partner, Co-Head of Entrepreneurial and SME Services
The Budget announcement today delivered some positive signals - such as widened eligibility for enterprise incentives, a review of tax systems to better support entrepreneurs, and free apprenticeships for SMEs. However, it stopped short of the deeper reforms businesses were hoping for.
The reality is that rising costs remain the biggest challenge. The proposed national minimum wage and national living wage increases could add around £1,500 and £900, respectively, per full-time employee. Combined with the recent Employer’s National Insurance hike, this puts further pressure on small business owners already battling inflation and high energy bills.
Owner-managed businesses also face continued long-term uncertainty in how they manage the changes to Business Property Relief which are set to apply from 6 April 2026, bringing inheritance tax risk to many businesses.
If you run a business, now is the time to act. Don’t wait for certainty, reach out for advice on your tax position, succession plans, and cost strategies to make informed decisions that keep your vision on track.
The expansion to the Enterprise Management Initiatives (EMI) share option qualifying limits, its first update since 2012, is a very welcome development. For the first time, larger scale-ups (with more employees and a bigger gross asset base) can operate EMI plans.
From 6 April 2026 onwards, and in most cases in relation to existing EMI share options, many more companies will qualify, including those with:
- gross assets of up to £120 million (up from £30 million)
- up to 500 employees (up from 250 employees)
This means more businesses can use tax-advantaged options to attract and retain talent. In addition, the doubling of the aggregate limit to £6 million of the value of shares that can be put under EMI options should be game-changing in terms of employee incentive plans. It also ensures that one of the most tax-advantaged employee incentive schemes available anywhere in the world is now accessible to larger mid-market businesses, when before they were excluded.
This sits comfortably with the Government’s stated aim of wanting to grow the economy, as companies will be able to continue to use targeted share incentives to attract and retain the highest performing employees, even when those companies have grown beyond traditional SME status.
Starting today, when owners sell to an employee ownership trust (EOT), only half their gain will qualify for the zero capital gains tax (CGT) relief. This means an effective CGT rate of 12% will apply to their gain on sale, payable by January of the tax year following the EOT transaction. Business Asset Disposal Relief cannot be claimed on the same disposal.
In most cases, owners will need to receive sufficient cash consideration upfront to pay the CGT charge, funded either by surplus cash gifted by the company to the trust or bank debt. We expect this change is unlikely to significantly curtail the growing popularity of sales to EOTs, particularly as a 12% effective CGT rate still compares favourably to 24% CGT and 39.35% additional rate dividend tax. However, this may mean that sales to EOTs will be less viable for those businesses with limited surplus cash and/or are unable to raise debt.
This Budget accelerates the UK's shift towards a fully digital tax environment. Mandatory e-invoicing for VAT, digital tagging of corporation tax returns and HMRC's ambition for 90% of interactions to be digital by 2030 mean that compliance will increasingly rely on real-time automated processes. For in-house tax functions this isn't just about meeting new requirements, this is about rethinking their tax operating model, assessing future skills needs and how the team partners with the business such that they become data-driven and technology enabled.
Now is the moment to invest in robust data foundations and tax technology. Structured, accurate data and connected systems will be critical for those businesses looking to stay ahead. On a day like today, those who have already embraced digitisation can quickly model the impact of policy changes such as the new national insurance rules on salary sacrifice and deliver strategic insights at speed.
More widely, the Budget provided for investment in AI and automation focused on helping businesses scale efficiently, offsetting labour shortages and driving competitiveness. However, rising employment costs could combine with automation-driven job losses, resulting in uncertainty for businesses when it comes to hiring decisions and identifying those with the requisite skills. This tension will impact not just in-house tax teams but business more generally and may well be a tightrope that Heads of Tax and CFOs increasingly find themselves having to walk.
