UK Budget 2025: the impact for businesses, business owners and investors
Insight
On 26 November 2025, after months of speculation, the Chancellor of the Exchequer Rachel Reeves delivered her second Budget.
With many rumours circulating before the Budget announcement, some of the more radical predictions did not materialise, such as an ‘exit tax’ for those leaving the UK, the introduction of employer National Insurance contributions (NICs) on Limited Liability Partnership (LLP) members, the abolition of various inheritance tax reliefs, a cap on the Capital Gains Tax (CGT) principal private residence relief for properties over a certain value or a wide-ranging wealth tax. Nonetheless, this was one of the highest tax-raising Budgets in recent years, with a large variety of tax measures.
So far as business is concerned, the main changes are those set out below. As a general comment, and following the publication of the Corporate Tax Roadmap last year – which recognised the need for certainty and stability – the impact for businesses was not expected to be extensive and this has largely proved to be the case.
Capital Allowances
From 1 January 2026, a 40% first-year allowance rate will be introduced for main rate qualifying plant and machinery expenditure for both companies and unincorporated businesses. This will likely primarily benefit mixed partnerships that do not qualify for the existing 100% Annual Investment Allowance (AIA) or full expensing regimes.
From April 2026, the main rate writing-down allowances will reduce from 18% to 14%, but this should not adversely impact businesses which benefit from AIA and full expensing.
Enterprise Management Incentive options
There is good news for companies wishing to grant share options to staff under the tax-advantaged Enterprise Management Incentive (EMI) regime. For options granted after 5 April 2026, company eligibility will be expanded, with the employee and company share option limits doubling to 500 employees and £6m respectively.
Furthermore, the gross asset test for the granting company will be increased from £30m to £120m. In addition, the exercise period will be extended to 15 years including for existing arrangements. The need for EMI options to be notified to HMRC will also be removed from April 2027, although no further details are currently available.
Unfortunately, the individual limit on the value of EMI options has not been increased from the current £250,000.
Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)
From 6 April 2026, the VCT and EIS annual investment limit which companies can raise will double to £10m, with a limit of £20m for knowledge-intensive companies. Additionally, the lifetime investment limit will be doubled to £24m and £40m respectively. The gross assets test for companies will double to £30m before the issue of shares and increase to £35m (from £16m) after the issue. However, the income tax relief that can be claimed by an individual investing in VCTs will decrease from 30% to 20%.
Stamp duty
In order to benefit newly listed companies and encourage greater trading in respect of transfers made on or after 27 November 2025, an exemption from the 0.5% Stamp Duty Reserve Tax (SDRT) will be introduced for transfers of securities in companies for the three years after a listing on a UK-regulated stock exchange.
In addition, as part of the modernisation of stamp duty, the reporting of stamp duty and SDRT on the transfer of UK securities will be simplified, with a new single tax to be known as the Securities Transfer charge and a digital self-assessment service – legislation is to follow.
Sales to Employee Ownership Trusts (EOTs)
EOTs are intended to facilitate and encourage employee ownership of businesses and, to date, subject to various conditions, a sale of shares to an EOT has been free of CGT for the selling shareholders. However, for disposals on or after 26 November 2025, only 50% of the gain will be exempt.
Incorporation Relief
Incorporation Relief allows sole traders or partners in a partnership to transfer their business to a company in exchange for shares without triggering CGT. This relief applies automatically if the conditions are met and no claim is required.
For transfers after 5 April 2026, taxpayers will need to make a claim for Incorporation Relief and provide necessary supporting information, although the relief itself is not changing.
Share exchanges and corporate reconstructions
Share exchanges and corporate reconstructions can usually be carried out in a tax-neutral manner, provided they are undertaken for bona fide commercial purposes and where tax avoidance is not one of the main purposes. These anti-avoidance provisions are to be modernised and made more effective.
It is proposed to remove the bona fide commercial reason requirement with a focus on whether the reduction or avoidance of liability to CGT or corporation tax is one of the main purposes of the arrangements.
The proposed rules also give HMRC greater flexibility to counteract any avoidance of tax in a manner which is just and reasonable. The measure is effective for transactions on or after 26 November 2025. However, if a clearance application under the old rules has been made to HMRC, then the old rules will apply if the proposed transaction is undertaken by the later of 60 days from the Budget or 60 days from receipt of HMRC clearance.
Research and development (R&D) advance assurance
A targeted advance assurance service will be piloted in spring 2026 to enable small and medium enterprises to clarify key aspects of their R&D claims before they are submitted to HMRC.
Close companies
The Government will consult on a proposal for close companies (a company controlled by five or fewer shareholders or any number of shareholder directors) to report transactions between close companies and their shareholders to HMRC.
International tax matters
Following a consultation on transfer pricing, permanent establishments and diverted profits tax, various changes will be made for company accounting periods beginning on or after 1 January 2026:
- UK-to-UK transactions will be exempt from transfer pricing where there is no risk of tax loss;
- The UK permanent establishment definition will be amended in line with the latest OECD definition, and the Investment Manager Exemption will be updated; and
- The diverted profits tax will be repealed and replaced with a corporation tax charging provision for unassessed transfer pricing profits.
VAT changes
From 1 April 2026, VAT zero rating will apply for businesses donating goods to charity for use by the charity in its charitable services or for distribution to those in need. This will supplement the current zero rating where the donation is for its onward sale to raise funds for the charity,
The Government has announced that from 1 April 2029 all UK VAT invoices will have to be issued electronically in a specified electronic format.
Other announcements
- Income tax and NIC thresholds: the existing freeze on income tax thresholds and NICs thresholds for employees and self-employed individuals will be extended for a further three years from April 2028 to April 2031.
- Pensions contributions: from April 2029, employee pension contributions made under salary sacrifice in excess of £2,000 per year will be subject to employee and employer NICs.
- Income tax on investment income: from April 2026, the ordinary rate on dividend income will increase by 2% to 10.75% and the upper rate by 2% to 35.75%. The additional rate of 39.35% will remain. From April 2027, tax on savings income will increase by 2% across all bands to 22% (basic rate), 42% (higher rate) and 47% (additional rate). Also, from April 2027, separate tax rates will apply for property income matching those for savings income.
- Tax avoidance and administration: a host of measures have been announced with the aim of 'closing the tax gap' and making the tax system fairer. These include increased penalties in certain cases, strengthening HMRC powers to tackle fraud within the Construction Industry Scheme, new powers against tax scheme promoters, tougher sanctions for advisers, and whistleblower rewards of up to 30% for tips leading to major recoveries.
UK Budget 2025 insights
The 2025 Budget marks a defining moment for the Government’s fiscal strategy, with measures aimed at stabilising the economy and supporting sustainable growth through uncertain times.
At Farrer & Co, we examine what the announcements mean in practice. From tax and property to employment and private wealth, our lawyers consider the Budget’s key provisions and the opportunities they create across sectors. Our insight is designed to help clients anticipate change and plan strategically for the year ahead.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2025
