Tax considerations for business owners 2025/2026

This year brings tax changes that will fundamentally reshape the landscape of UK business. From rising National Insurance contributions to adjustments in Capital Gains and Inheritance Tax, the “tough choices” that Chancellor Rachel Reeves announced in her Autumn Budget are set to redefine how many companies manage their tax liabilities.

In this article, Parry Jackson and Lewis Ratcliffe, Partners in our Business team, outline the key changes you need to know for 2025/2026.

What tax rates are changing in 2025?

Here’s a breakdown of the tax changes coming this year.

Employers’ National Insurance contributions (NICs)

Effective 6 April 2025: Employers’ NICs will increase from 13.8% to 15%.
The NIC liability threshold will drop from £9,100 to £5,000 until 5 April 2028, after which it will be adjusted with the consumer price index.
To ease the impact, the employment allowance will rise from £5,000 to £10,500, and the previous £100,000 eligibility cap will be removed.

What does an increase in Employers’ NICs mean for businesses?

These changes are likely to increase employment costs, prompting businesses to consider cost-mitigation strategies, such as:

Deferring pay rises or new recruitment.
Exploring the use of contractors over employees where appropriate.
Reviewing alternative remuneration structures.

Owner managed businesses have more flexibility over profit extraction, and owner-directors will want to revisit their current split of salary vs dividends ahead of the new tax year.

Capital Gains Tax (CGT) adjustments

For asset disposals made on or after 30 October 2024:

The lower CGT rate increases from 10% to 18%, and the higher CGT rate rises from 20% to 24%. This change applies to assets other than residential property and carried interest.
There has been no change to the CGT rates for residential property, which remain at 18% and 24%.
Business Asset Disposal Relief will remain at 10% for now, rising to 14% from 6 April 2025 and to 18% from 6 April 2026.
These has been no change to the £1 million lifetime limit.

What does this mean for businesses?

Strategies to reduce exposure to CGT have become more limited, however several approaches could be considered to help minimise liabilities. For married couples and civil partners, transferring ownership of assets before disposal potentially reduces the total CGT exposure. For more information on what the CGT changes mean for taxpayers, you can read our blog here.

Carried Interest

Effective 6 April 2025: The tax rate on carried interest gains increases from 28% to 32%.
Further reforms will integrate these gains into the income tax system from April 2026.

What does an increase to the tax rate on carried interest gains mean for investment firms?

This change is aimed at raising revenue without risking the country’s competitive edge. This was a pragmatic move with an outcome that is irritating but not as bad as it could have been. Probably worse for most PE funds is the wider increase in taxes on their operating businesses, the higher inflation for longer, higher expected interest rates and lower projected growth numbers.

Inheritance Tax (IHT)

The IHT nil-rate band remains at £325,000, with a residence nil-rate band of £175,000 until at least 5 April 2030.
Reforms to Business Property Relief (BPR) and Agricultural Property Relief (APR) mean that only the first £1 million of assets qualifies for 100% relief; any excess qualifies for 50% relief.
Pension and IHT reforms will also take effect, with unused pension funds being included in IHT calculations from 6 April 2027.

What do changes to IHT mean for businesses?

The changes to APR and BPR have surprised many, especially as the Government shows no indication of reversing its stance, despite significant lobbying efforts. From 6 April 2026, there will be the prospect of agricultural estates and many businesses facing significant tax costs, certainly in the absence of taking any action/planning.

Non-domicile taxation

Effective 6 April 2025: The remittance basis for non-UK domiciled individuals will be abolished. It will be replaced by a straightforward residence-based system with “internationally competitive arrangements” for those coming to the UK on a temporary basis.

What does this mean non-UK resident and non-domiciled owners of businesses?

Sometimes for the first time, non-UK residents and non-domiciled owners of UK businesses will have an exposure to UK IHT under the proposals – even if offshore structures such as Trusts have been implemented in the past as a form of asset protection.

Furnished Holidays Lettings (FHL)

The Government has decided to abolish the FHL scheme’s tax benefits from 6 April 2025. This will mean reduced deductions and increased tax liabilities.
Our research shows that over 130,000 people will be impacted by this change, which will force many to budget for higher tax payments and reassess their cash flow and profitability.

What does this mean for property owners?

Whilst the FHL changes present a significant change for property owners, it also presents an opportunity for them to reassess and optimise their portfolio. Property owners will need to consider making financial and operations adjustments, in addition to exploring alternative financing options and checking their pension strategy.

Should you be reviewing the legal structure of your business?

It is important for business owners to regularly review the ownership structures, and whilst reviewing the structure of your business might seem like a consideration for the distant future, given economic uncertainties, rising taxes and increasing costs, it’s important to assess whether your current structure aligns with both your short and long-term objectives. Aligning your structure with your goals now can help you better prepare for the evolving tax landscape and potential challenges

The legal structure of your business affects not only how you extract funds, but also the opportunities available for future planning. Your ownership arrangement can create additional avenues to optimise tax efficiency and plan for succession. Implementing an Employee Ownership Trust (EOT), for example, can be an effective way to incentivise your staff and create a smooth succession plan.

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Is it still appropriate to be a sole trader/partnership, or is now the time to incorporate?

Each business structure has its own pros and cons; it’s not just about the tax payable. Although lower corporate tax rates have often driven the decision to incorporate, recent tax reforms have narrowed that advantage.

Make sure you consider your personal circumstances fully. Beyond just tax rates, your individual financial needs, lifestyle goals and long-term plans should guide your decision on the most appropriate business structure.

Ask yourself:

What are the long-term goals of your business?
Do you need access to all the profits the business makes?
Would a company restrict the flexibility of your business?
Are there any wider commercial implications of each route?
What are the tax implications for your business of different structures?
Are you planning to exit the business?

Having a strategy in place ahead of the time when you plan to exit your business is key to ensuring you maximise the proceeds, or minimise the tax position. Whether you’re winding down the company or looking to sell, there are actions you can take to help.

You may still be entitled to some Business Asset Disposal Relief, which was formally known as Entrepreneur’s Relief. Although it’s been reduced to a lifetime allowance of £1,000,000, it can still be very lucrative – giving you the option to pay tax at 10% on profits from either the sale of your business or the final dissolution of the business.

Bearing this in mind, planning the remuneration you may need ahead of a business exit will be important to maximise the extraction at the lower tax rate. As with all reliefs, there are a number of conditions you must meet in order to qualify.

The structure of your business will impact the way you extract funds. For sole traders/partnerships, you’ll be taxed on the full taxable profits of the business. In contrast, if you’re trading as a company, you’ll need to think about how you extract funds and remunerate yourself. This could be through a salary, dividends, interest, pension contributions, or a mixture of these.

When assessing your personal circumstances, it’s important to consider your business outlook for the upcoming year. This will help you determine the most suitable remuneration package. The first step in planning your remuneration is to establish how much you need—or want—to extract from the business, making sure this aligns with what the business can afford.

If you are trading as a company, ask yourself the following: who are the shareholders of the business?

If the business is only in your name, consider sharing ownership with your spouse. You have several options: owning shares jointly, splitting them equally, dividing them in another ratio, or even creating different share classes.

Similarly, if you own rental properties, review whether keeping them solely in your name is the best approach. Joint ownership may allow you to allocate profits more efficiently. When rental income is shared between spouses, you can often use the lower tax rate band of the partner with the lower income—provided HMRC is notified of the profit-sharing arrangement.

By carefully structuring ownership, you can optimise your tax position. This allows you to better plan how to extract funds from the business—taking advantage of dividend allowances, keeping income within the basic rate band, or ensuring you don’t lose your personal allowance if your taxable income exceeds £100,000.

Your ownership structure also plays a vital role in your short-term extraction planning and long-term exit strategy. For example, including your spouse as a shareholder could help you take advantage of an additional Business Asset Disposal Relief allowance, subject to certain conditions. This can lead to significant tax efficiencies and smoother succession planning.

How can pension contributions optimise my tax position?

Pension contributions can be a highly effective tool for managing your tax position, especially when your effective tax rates exceed the additional rate. By making a gross contribution to your pension, you extend the band of income taxed at the basic rate, which can lower your overall tax liability.

For example, if your income falls between £100,000 and £125,140, you risk losing your personal allowance, resulting in an effective tax rate of around 60%. Making a pension contribution in this scenario may help preserve part of your allowance. Those affected by the high-income child benefit charge might also see a benefit.

It’s important to note that there are annual limits on pension contributions, and other factors must be considered when determining the appropriate level of contribution. To be effective, these contributions must be made before the end of the tax year.

Business owners can also contribute to their pensions as employees of their company. Such employer contributions can even be used to offset your company’s corporation tax.

We strongly advise you to consult an independent financial advisor before making any decisions regarding pension contributions, to ensure that the strategy aligns with your overall financial goals. It is also important to be aware that unused pension funds will be included in IHT calculations from April 2027.

Are you Making Tax Digital (MTD) compliant?

HMRC will soon start communicating with affected taxpayers about the upcoming changes to the tax system. Here are the key deadlines you need to know about:

April 2025: Sole traders and those with self-employed income can voluntarily start providing updates and implementing digital processes ahead of the mandatory deadline.
April 2026: MTD becomes mandatory for sole traders with an annual income of £50,000 or more.
April 2027: The threshold lowers to £30,000.

It’s expected that around 780,000 people with business or property income over £50,000 will join the MTD for ITSA service from April 2026, with a further 970,000 joining from April 2027.

You can read more in our MTD guide here.

Simplifying tax compliance in 2025

As tax rules and policies continue to evolve, it’s important to stay informed. Whether you’re reassessing your business structure, optimising how you extract profits, or signing up for MTD, we’ll help you navigate the challenges of the 2024/2025 financial year and beyond.

If you’d like further advice or support, please contact us to speak with Parry or Lewis.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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