From dividends to succession: a recap of the 2025 Budget’s impact on owner-managed businesses

The measures announced in the 2025 Budget, some of which have already been implemented, will have a significant impact on owner-managed businesses (OMBs). Here, we provide a reminder of the key considerations.

Income extraction

One of the headline announcements was a 2% increase in income tax rates applying to dividends, property income and savings income:

Historically, the most tax-efficient way to extract income from a company was to pay a modest salary and supplement it with dividends. Changes in recent years to dividend tax rates and national insurance (NI) have made this less clear-cut, and the latest increases add further complexity. A tailored approach is now essential.

Additionally, income tax thresholds are frozen until April 2031. While this is not a direct rate increase, wage inflation will push more individuals into higher tax bands, increasing the overall tax burden (commonly referred to as fiscal drag). This will affect both business owners and employees, creating pressure to raise salaries to maintain real income levels.

Employee costs for OMBs

The cost of hiring staff will rise for many OMBs due to several measures:

• National living wage and national minimum wage: To increase from April 2026 following earlier rises in April 2025, which were in addition to employer’s NI rises.
• Pension salary sacrifice: From April 2029, employer and employee NI contributions will be charged on pension salary sacrifice contributions above £2,000 per year. Currently no NI contributions are charged.
• Income tax thresholds: Employees will feel the impact of fiscal drag, reducing disposable income in real terms.

Employee incentivisation

Share options and other equity incentives offer an attractive alternative to cash bonuses for companies.

The enterprise management incentive (EMI) option scheme is extremely popular, as it offers generous tax reliefs to employees. From April 2026, more companies will be eligible to offer EMI options following limits for companies being increased as below:

• employee limit: 500 (up from 250),
• gross assets test: £120m (up from £30m).
• company share option limit: £6m (up from £3m).
• maximum holding period: 15 years (up from ten years) and will include existing EMI option contracts.

However, individual employee limits remain at £250,000, so additional arrangements (e.g., growth shares or unapproved options) may still be needed for key staff.

Investment in capital assets

The UK continues to offer a competitive capital allowance regime which provides tax relief on qualifying capital expenditure. For most OMBs, the current framework, comprising the £1 million annual investment allowance, first-year allowances (FYA), and full expensing, will remain sufficient.

However, the changes may give relief where the previous regime fell short. On 1 January 2026, a new 40% FYA was introduced, and is available where full expensing does not apply. This includes assets acquired for leasing and for sole traders and individual members of partnerships.

At the same time, the main rate for writing down allowances is being reduced from 18% to 14% from April 2026. This change may delay tax relief to the extent full relief wasn’t already available, which may negatively impact cash flows.

OMBs succession planning

A challenge for many OMBs is succession planning or exiting the business in situations where a third-party sale is not an option, or the management team (to the extent they exist) don’t have the appetite for a management buy-out.

Employee ownership trusts (EOTs) are a popular route for succession, allowing business owners to transfer the ownership of their company to employees in exchange for generous tax incentives, mainly the capital gains tax (CGT) relief on disposals.

With CGT relief now restricted to 50% of the gain (previously 100% relief), this essentially increases the tax charge from 0% to up to 12%. While there is clearly still a significant CGT advantage of EOTs, this change will prompt business owners to consider alternative exit strategies.

The introduction of anti-avoidance rules that apply to share exchanges and company reconstructions may impact succession planning. The rules target those cases where additional arrangements have been made to obtain a tax advantage that would not ordinarily have been available. The concern here is that these rules will catch genuine commercial transactions, not just those which have clear avoidance characteristics. Careful planning is therefore essential.

Inheritance tax (IHT)

Unused BPR allowances will be transferable between spouses and civil partners. As a reminder, if a person dies before April 2026, their estate may be eligible for 100% IHT relief, whatever the value of their business. After this date, BPR will be restricted.

• Full relief applies up to £2.5 million per individual.
• Above this threshold, relief reduces to 50%, meaning up to 20% IHT could apply on business value.

Help from the experts

The UK tax landscape is becoming increasingly complex with these added challenges for OMBs. Savvy business owners are already reviewing their position and how the changes affect them and their business.

If you haven’t started yet, we recommend that you identify planning opportunities that protect value and support long-term wealth transfer to future generations. Please contact us for more information or specific advice about your situation.