Let’s Talk About the Elephant in the Room
The headlines scream “£26 billion in tax increases” the largest package since last year’s budget. But here’s what that actually means for you: if you’re turning over £500k with healthy margins, employing a small team, and taking dividends from your limited company, you’re looking at an extra £8,000–£15,000 in annual tax by 2029. Not enough to close your doors, but enough to notice.
The Chancellor has done something quite clever (and quietly brutal): rather than hiking rates dramatically and causing uproar, she’s extended the freeze on tax thresholds until 2031 and introduced targeted increases that hit specific income types. It’s death by a thousand cuts, and the cumulative effect is significant.
UK Tax Burden: The 70-Year High
The tax burden will reach 38.3% of GDP by 2030-31—the highest since the 1950s.
The Invisible Tax Rise: Why Frozen Thresholds Matter More Than You Think
Here’s the thing nobody’s properly explaining: when tax thresholds freeze but wages and profits rise (even modestly), you get pulled into higher tax brackets without any actual rate change. It’s called fiscal drag, and it’s remarkably effective at extracting more tax without the political pain of rate increases.
The Personal Allowance has been frozen at £12,570 since April 2021. It’s now staying frozen until April 2031, a full decade. The higher rate threshold (£50,270) is frozen for the same period. Let’s put this in perspective:
A Manufacturing Business Example
2021: Owner takes £50,000 salary
Tax: £7,486
2027: Same buying power requires £57,000
Tax on £57,000: £9,932
Extra tax: £2,446/year just from frozen thresholds
A Consultancy Example
2021: Profit of £75,000
Tax: £16,986
2027: Same real-terms profit (£85,500)
Tax: £21,086
Extra tax: £4,100/year from fiscal drag
The Fiscal Drag Effect: Real-World Impact
This affects everyone, sole traders, limited companies, partners, and employees. If your business is growing nominally (even if it’s just keeping pace with inflation), you’re paying proportionally more tax. And this compounds every single year until 2031.
The Scale of the Squeeze
The Office for Budget Responsibility forecasts that by 2030-31, the extended threshold freeze will have:
- 5.2 million additional people paying income tax for the first time
- 4.8 million more people dragged into the 40% higher rate band
- 600,000 more taxpayers hitting the 45% additional rate
The proportion of taxpayers paying higher or additional rate tax will jump from 15% in 2021-22 to 24% by 2030-31. The overall threshold freeze is expected to raise £38 billion per year by 2029-30 the Institute for Fiscal Studies calls it “likely the largest overall tax increase from a single policy in the post-war period.”
If You Employ People: The Employer NIC Reality
This is where the budget gets expensive for most of you. The employer National Insurance rate jumped to 15% in April 2025 (up from 13.8%), and the threshold at which you start paying dropped from £9,100 to £5,000. That’s now permanent and frozen until 2031.
Let me translate that into actual costs:
The Employment Allowance: Your Only Relief
There is one piece of good news here. The Employment Allowance increased from £5,000 to £10,500, and the £100,000 eligibility threshold was scrapped. This means most small businesses can now claim it.
However: Single-director companies remain ineligible. So if you’re the only employee of your limited company, you get nothing. If you employ even one other person, you can claim the full £10,500 against your employer NIC bill.
Real Business Scenarios
Hospitality Business: 8 Staff
Average salary: £24,000
Extra NIC per employee: £780
Total extra cost: £6,240
Less Employment Allowance: -£5,500
Net increase: £740/year
Still hurts, but the increased allowance softens the blow considerably.
Construction Firm: Director + 5 Staff
Average salary: £32,000
Extra NIC per employee: £894
Total extra cost: £5,364
Less Employment Allowance: -£5,500
Net increase: Fully covered
The Employment Allowance completely absorbs your increased NIC costs.
Limited Companies: The Dividend Dilemma
From April 2026, dividend tax rates increase by two percentage points for basic and higher rate taxpayers. This is where limited company directors need to pay attention, because it fundamentally changes the salary-versus-dividend equation.
Remember, dividends also incur corporation tax first (19% or 25% depending on profits). So the effective combined rate for a higher-rate taxpayer extracting dividends from a company paying 25% corporation tax becomes approximately 51.8%. The OBR expects this measure to raise £2.1 billion by 2029-30.
Salary vs Dividends: The New Math (2026/27)
Comparing £60,000 extraction via different methods (25% corp tax, higher-rate taxpayer)
What This Means for Your Extraction Strategy
The traditional small salary (£12,570) plus dividends strategy is still optimal for most directors, but the gap has narrowed significantly. Here’s what £50,000 in total extraction looks like:
That saving used to be £2,800/year. It’s still worth doing the low salary/high dividend route, but the benefit has been cut by 45%.
The 2029 Pension Salary Sacrifice Trap
There’s another sting coming. From April 2029, salary sacrifice pension contributions above £2,000 annually will be subject to both employer (15%) and employee NICs (8% or 2%). This kills one of the most tax-efficient ways to extract money from your business.
If you’re currently sacrificing £20,000/year into your pension, you’re going to face an extra £4,140 in combined NICs on £18,000 of that (15% + 8% = 23% on amounts above £2,000). The OBR expects this to raise £4.7 billion in 2029-30 and £2.6 billion in 2030-31.
Capital Allowances: Winners and Losers
This is sector-specific, but if you’re in manufacturing, construction, transport, or any capital-intensive business, these changes matter.
From April 2026:
The new 40% First Year Allowance is specifically for sole traders and partnerships; limited companies have access to full expensing instead (100% relief on qualifying plant and machinery up to £1 million).
Electric Vehicle Advantage Extended, But There’s a Catch
The 100% First Year Allowance for zero-emission vehicles is extended to April 2027. If you’re running vans, this is genuinely valuable; you can write off the entire cost of an electric van in year one.
Example: £45,000 electric van = £45,000 relief in year 1 = £8,550 tax saved (at 19% corp tax) or £18,000 saved (at 40% income tax for sole traders).
However, from April 2028, a new pay-per-mile tax (eVED) kicks in at approximately 3p per mile, around half what petrol drivers pay in fuel duty. If you’re driving the average 8,500 miles per year, that’s an extra £255 annually. For high mileage businesses (20,000+ miles), this becomes a £600+ annual cost that wasn’t there before. The OBR expects this to raise £1.1 billion in 2028-29, rising to £1.9 billion by 2030-31, and forecasts it will result in 440,000 fewer EV sales by March 2031.
If You’re Thinking About Restructuring: Critical Changes to Know
If you’ve been considering incorporating your business or selling it, two quiet changes from this budget will significantly affect your planning.
Incorporation Relief: No Longer Automatic
From 6 April 2026, incorporation relief, which allows you to defer Capital Gains Tax when transferring assets from a sole trader or partnership into a limited company, will no longer be given automatically. You’ll need to actively claim it.
This sounds like a minor administrative change, but it’s not. Incorporation relief is what makes transitioning from sole trader to limited company tax-neutral. Without it, you’d face an immediate CGT bill on any business assets with capital gains (goodwill, property, investments) when you transfer them into your new company.
Why This Matters
Historically, incorporation relief applied by default if you met the conditions. Now, it’s a claim-based relief. Miss the claim deadline or get the paperwork wrong, and you’ve triggered a taxable event that could have been avoided.
If you’re planning to incorporate in 2026 or beyond, this needs to be on your accountant’s checklist. It’s not complex, but it is essential and the kind of detail that gets missed if you’re using a low-cost online incorporation service rather than proper advice.
Employee Ownership Trusts: Relief Halved
If you’re planning your exit strategy, this one stings. Selling your company to an Employee Ownership Trust (EOT) has been one of the most tax-efficient ways to exit, offering 100% Capital Gains Tax relief. As of 26 November 2025 (Budget Day), that relief has been slashed to 50%.
EOTs have become increasingly popular for business owners who want to reward their teams while avoiding a large CGT bill. Under the old rules, if you sold a £2 million business to an EOT, you paid zero CGT. Now, you’ll pay CGT on half of the gain, so if your base cost was £200,000, you’re looking at a £900,000 taxable gain and approximately £216,000 in CGT (at 24%).
Property & Investment Income: The Separate Tax Schedule
If you hold rental properties personally or rely on savings income, a fundamental restructuring from April 2027 creates an entirely separate tax regime for investment income.
Property Income: The New Rates
Crucially, limited company landlords remain unaffected; these higher rates only apply to individuals. Finance cost relief (mortgage interest) will be provided at the basic rate of 22%. The OBR estimates this will raise approximately £500 million annually from 2028-29.
Savings Income: Same Treatment
Savings interest faces identical increases of 22%/42%/47% from April 2027. The Personal Savings Allowance (£1,000 for basic rate, £500 for higher rate) remains unchanged, so anything above that threshold gets hit with the higher rates.
The Limited Company Advantage Grows
If you’re a higher-rate taxpayer holding properties personally, the effective marginal rate on rental income is now 42% on top of Section 24 restrictions that already limit mortgage interest relief. For properties with significant financing costs, you could be looking at effective tax rates above 50%.
Limited company structures pay 19% corporation tax (or 25% above £250k profits) with full mortgage interest deductibility. The gap just became a chasm. If you’re holding £500k+ in property personally and you’re a higher-rate taxpayer, the conversation about restructuring before April 2027 is no longer optional, it’s essential.
The ISA Shock: Pushing You Into the Market
This change received almost no media coverage, but it’s a significant shift in how the government wants you to save. From April 2027, if you’re under 65, your Cash ISA allowance is being cut from £20,000 to £12,000, with £8,000 ringfenced specifically for stocks and shares.
Under 65
Cash ISA: £12,000 maximum
Stocks & Shares: £8,000 ringfenced
Total allowance: £20,000 (unchanged)
65 and Over
Cash ISA: £20,000 maximum
Stocks & Shares: Full flexibility
Total allowance: £20,000 (unchanged)
The message is clear: the government wants working-age savers exposed to stock market risk. Older savers who may remember Black Wednesday, the 2008 crash, and the pandemic plunge get to keep the full £20k in cash. Everyone else is being nudged into equities whether they like it or not.
Why This Matters Now
With savings income tax rising to 22%/42%/47% from April 2027 and dividend tax already at 10.75%/35.75%, the tax-free wrapper of an ISA becomes more valuable than ever. But if you’re holding significant cash for near-term goals (house deposit, business expansion, emergency fund), you’re being forced into either accepting stock market volatility or paying higher tax on interest outside an ISA.
If you’ve been sitting on the fence about maxing out your Cash ISA while you still can, you have until April 2027. After that, you’ll need to either commit £8k to stocks and shares or accept that £8k of your savings will sit outside the tax-free wrapper.
Making Tax Digital: The Operational Headache You Can’t Ignore
This is less about tax and more about compliance, but it’s going to cost you time and money. Making Tax Digital (MTD) for Income Tax rolls out in phases, and if you’re not prepared, April 2026 will arrive uncomfortably fast.
April 2026
Mandatory for businesses with an income over £50,000
Quarterly digital submissions required via MTD-compatible software
April 2027
Extended to businesses with an income over £30,000
Threshold lowered, catches more sole traders and partnerships
April 2028
Extended to businesses with an income over £20,000
Most small businesses are now in scope
April 2029
PAYE integration for Self Assessment
Self Assessment liabilities collected in-year through PAYE where possible
What You Actually Need to Do
MTD requires three things:
- Digital record-keeping: You must maintain business records digitally (spreadsheets count, but MTD software is better)
- MTD-compatible software: Your software must connect to HMRC via API (FreeAgent, Xero, QuickBooks, etc.)
- Quarterly submissions: You submit updates every quarter, not just annually
Software Costs
Entry-level MTD software: £10–£15/month
Full accounting packages: £25–£40/month
Annual cost: £120–£480
Factor this into your 2026/27 budget if you’re not already using compliant software.
Time Investment
Initial setup: 3–5 hours
Quarterly submissions: 1–2 hours each
Annual time cost: 7–13 hours
Or pay your accountant to handle it. Expect fees to rise to cover the additional workload.
Business Rates: The Hospitality Lifeline
If you’re in retail, hospitality, or leisure, the 40% business rates relief continues for 2025/26. From April 2026, the system shifts to permanently lower rates for these sectors, funded by higher rates on properties worth over £500,000.
What This Means
Over 750,000 retail, hospitality and leisure properties will pay permanently lower rates from April 2026. The exact reduction depends on your property value, but this is a structural improvement, not a temporary relief.
A new transitional relief scheme will also cap increases following the 2026 revaluation, preventing sudden spikes.
This is one of the few areas where the government is actually reducing the burden on small businesses. If you’re in these sectors, this partially offsets the employer NIC increases, though it doesn’t fully compensate.
What Didn’t Change (And Why That Matters)
Sometimes what stays the same is as important as what changes. Here’s what the Chancellor left untouched:
VAT Threshold: £90,000
Remains unchanged until at least March 2026. If you’re hovering near the threshold, you’ve got another year of breathing room.
Corporation Tax Rates
19% (up to £50k profits) and 25% (over £250k) are locked in under the Corporate Tax Roadmap. No surprises here.
R&D Tax Relief
The merged RDEC scheme at 20% continues unchanged. If you’re doing qualifying R&D, the incentive structure remains intact.
Apprenticeships for Under-25s
Now free for SMEs, the 5% co-funding requirement has been removed. This is worth knowing if you’re considering hiring apprentices.
Your Action Plan: What to Do and When
December 2025 – March 2026
Immediate Actions
- Review dividend extraction plans, take dividends before April 2026 if you have retained profits
- Calculate actual employer NIC impact vs Employment Allowance benefit
- Choose and set up MTD-compatible software if income >£50k
- Review equipment purchase timing (40% FYA vs old 18% WDA)
- Max out Cash ISA contributions (£20k) while full allowance still applies
April 2026
Changes Take Effect
- Dividend tax rates increase (10.75%/35.75%)
- MTD mandatory for income >£50k
- New capital allowances structure (40% FYA, 14% WDA)
- Business rates reform for retail/hospitality/leisure
- Incorporation relief becomes claim-based (not automatic)
2026/27 Tax Year
Strategic Review
- Reassess salary vs dividend split under new rates
- Consider pension contribution strategy before 2029 NIC cap
- Review property holding structures if you’re a landlord
- If considering EOT exit, model the 50% CGT relief impact
April 2027
Further Changes
- Property income tax increases (22%/42%/47%) for individual landlords
- Savings income tax increases to same rates
- Cash ISA limit cut to £12k (under-65s only)
- MTD threshold drops to £30k income
April 2028
EV and Property Changes
- Electric vehicle mileage charge (eVED) at ~3p/mile
- High Value Council Tax Surcharge (£2m+ properties)
- MTD threshold drops to £20k income
April 2029
Final Major Changes
- Salary sacrifice pension NICs cap at £2,000
- PAYE collection of Self Assessment liabilities
- Mandatory e-invoicing for VAT
Final Thoughts: The Bigger Picture
This budget isn’t catastrophic for small businesses, but it’s undeniably a shift toward extracting more from successful enterprises. The combination of employer NIC increases, dividend tax rises, frozen thresholds, new compliance requirements, and the hollowing out of long-standing reliefs creates a cumulative burden that’s easy to underestimate if you only look at individual measures.
Cumulative Impact: £500k Turnover Business with 5 Staff
Additional annual tax cost for a typical £500k turnover business (limited company, director + 4 staff, £80k profit, £50k dividend extraction)
The truth is, you’re in the government’s sights. Not because you’re wealthy (though the tax system increasingly treats you as if you are), but because you’re large enough to be visible and material to revenue collection, yet small enough to lack the resources to restructure internationally or employ sophisticated tax planning.
The good news? None of these changes should derail a fundamentally sound business. They’ll reduce your returns and require some adaptation, but they’re not business-ending. The key is to be proactive: understand what’s coming, plan for it, and make strategic adjustments before deadlines force reactive decisions.
What We’re Doing for Clients
We’re conducting extraction strategy reviews for all limited company clients before April 2026, running MTD readiness checks for businesses with turnover over £50k, helping property investors assess whether restructuring makes sense before the 2027 changes, and reviewing business structures for anyone considering incorporation or EOT exits.
If you’d like to discuss how these changes specifically affect your business, get in touch. This is precisely the kind of stuff that’s worth spending an hour on now rather than discovering in your 2026/27 accounts that you’ve overpaid.
