UK Budget 2025: Navigating Tax Shifts and Market Impact

The Chancellor faces a delicate balancing act: raising taxes without crippling fragile growth or fuelling inflation, while reassuring markets that there is a credible plan to manage government debt in the years ahead. Time will tell whether she has been able to do just that.

The Budget has calmed markets for now, but we should be careful of judging the market’s reaction on the day of the budget itself. Markets have given the UK and the Chancellor the benefit of the doubt, largely because of the fiscal headroom created by this Budget. Questions remain over whether the tax increases planned for 2028-2029 and 2029-2030 will actually be implemented, given how close they fall to the next election. It is not the usual pre-election promise to increase the electorate’s taxes.

This Budget also didn’t wrestle with the big issues of the economy: an unsustainable welfare bill, low growth, low productivity and falling living standards; however below are some of the key measures relevant to our clients:

Income taxes

The headline grabbing announcements had already been leaked that all income tax thresholds were being frozen for a further 3 years. The personal allowance at £12,570, the higher rate threshold at £50,270 and the additional rate threshold at £125,140 are again being extended from April 2028 to April 2031.

The same applies to National Insurance contribution thresholds. Income tax rates may not be rising, but ‘fiscal drag’ ensures that as earnings grow, more taxpayers will slip into higher bands, especially those in the much-cited ‘working person’ category.

New tax rates will be created from April 2027 for property income. The property basic rate will be set at 22%, the property higher rate to 42%, and the property additional rate will be 47%. These rates will apply to England, Wales, and Northern Ireland.

The rates of income tax applicable to dividends will change from April 2026. The ordinary rate will be increased by 2 percentage points to 10.75% and the upper rate will also increase by 2 percentage points to 35.75%. However, the additional rate will remain unchanged at 39.35%. In line with the increase in dividend rates, the rate of charge under the loans to participator rules will also increase to 35.75%.

Given these changes, now may be the time to review your portfolio and explore alternative structures, including Family Investment Companies (FICs), an area where ZEDRA can provide support. The rates of income tax applicable to savings income will also increase by 2 percentage points across the basic, higher, and additional rates in line with the changes outlined above for property income also from April 2027.

There will also be changes to salary sacrifice arrangements for pension contributions limiting the amount that can be sacrificed every year to £2,000 from April 2029.

Amounts paid in excess of this amount will be subject to employee and employer NICs in the same way as the provision of other employment benefits. For instance, an employee earning £100,000 who sacrifices 10% of their salary will see the extra £8,000 subject to an additional 2% charge (£160) for the employee and 15% (£1,200) for the employer. Many businesses currently pass most or all of these savings into the employee’s pension.

Corporate taxes

A few capital allowances have been announced. The main pool annual writing down allowance will fall from 18% to 14% from April 2026 which will largely impact existing capital allowances pools, second-hand assets, and leasing.

A new 40% First Year Allowance will be introduced again for main rate capital expenditure from January 2026, which unlike the current system of Full Expensing, will be available to unincorporated businesses and UK leasing assets. The measure is aimed at stimulating UK economic growth, so it excludes assets leased overseas and any expenditures on cars or second-hand assets.

There will be no changes to the rate of Corporation Tax, however there are proposals to double the penalty for taxpayers who submit late Corporation Tax returns from April 2026.

VAT

The Skandia policy on VAT grouping has been abandoned by HMRC, effective 26 November 2025. The policy required multinational businesses with UK VAT groups to review the operations of the VAT grouping rules in other territories to work out the associated UK VAT treatment.

This adds complexity for companies operating through branches, notably financial services and insurance companies, including partially exempt businesses, for which VAT represents a real cost. For guidance on how these VAT changes impact your operations, get in touch with ZEDRA’s expert team today.

From April 2029 businesses will be required to issue all VAT invoices electronically. The impact of this is limited as the majority of invoices between business to business are already e-invoices and invoices to private individuals should not really be impacted.

Employee incentives

From April 2026, some of the qualifying conditions for Enterprise Management Incentives (EMI) employee share schemes are being relaxed.

The employee limit will double to 500 full-time equivalent employees, the gross asset test will quadruple to £120m, and the company share option limit doubles to £6m. The maximum length of time that options can be held is set to increase from 10 to 15 years for both new, and we believe, existing schemes.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) will also benefit from an increase in investment limits. From April 2026, both VCT and EIS limits will increase to £10m (£20m for Knowledge Intensive Companies, or ‘KICs’) and the company lifetime investment limit will increase to £24m (£40m for KICs). The gross asset test will also increase to £30m before the share issue and to £35m afterwards. However, whilst the VCT income tax relief will decrease to 20%, the rate of relief for EIS investments will remain at 30%.

The cash ISA allowance will fall from £20,000 to £12,000 per year from April 2027 for under-65s. The stocks and shares/investments ISA allowance remains unchanged at £20,000 per year.

Capital taxes

As previously announced, the Capital Gains Tax (CGT) rate for Business Asset Disposal Relief and Investors’ Relief will increase to match the main lower rate of 18%. There are also important changes from Budget Day that could affect share exchanges and reconstructions, even where HMRC has already granted clearance confirming no capital gains tax would apply.

If you are currently involved in a transaction of this nature, you should take urgent advice as the changes will be applied on a taxpayer-by-taxpayer basis, rather than the transaction as a whole.

The current CGT relief available on qualifying disposals to Employee Ownership Trusts (EOTs) will be restricted. Currently, and subject to qualifying conditions, it is possible for owners to sell their shares without paying any CGT. With immediate effect from Budget Day, the available relief will be reduced from 100% of the gain to 50%.

Inheritance tax thresholds are also frozen until April 2031, increasing the likelihood of more estates being liable. Following the controversial changes to Agricultural and Business Property Relief announced in last year’s Budget, there is a slight relaxation in that any unused relief will become transferable between spouses from April 2026.

From April 2028, the so-called Mansion tax will be introduced in England for residential properties worth £2m or more, following a revaluation of homes in bands F, G, and H.

New annual charges will be imposed starting at £2,500 and increasing to £7,500 for properties valued above £5m. These charges will be levied on the property owners rather than the occupiers, and whilst the revenue will be collected by local authorities it will be passed on in full to the central government.

Excise taxes

There will be a new mileage tax levied on EVs from April 2028 to ensure that all vehicles fairly contribute to congestion and wear and tear on the roads. The starting rate will be 3p a mile for battery electric cars and 1.5p for plug-in hybrid cars with the rate per mile increasing annually in line with CPI.

How this will impact the overall switch to EVs has yet to be seen, but will certainly impact people’s buying decisions. In particular, the onus to report the annual mileage to DVLA appears to be with the driver/taxpayer, which does raise interesting questions about compliance. Imagine buying a second-hand electric car — you’ll need to consider whether it comes with a ‘surplus’ or a ‘deficit’ of EV duty.

Tax on sugary drinks is extended to pre-packaged milkshakes and lattes from 2028, reversing an exemption when the tax was introduced in 2018.

English regional mayors are to be given powers to tax overnight stays in hotels and holiday lets, echoing existing plans in Scotland and Wales. A so-called ‘tourist tax’, this will only be an inflationary measure but is unlikely to impact consumer decisions.

Other changes

From April 2026, the national minimum wage will rise by 50p to £12.71 an hour for workers aged 21 and over, by 85p to £10.85 for those aged 18 to 20, and by 45p to £8 for 16- and 17-year-olds as well as apprentices. This is a welcome measure but one that will hit the casual labour and hospitality sectors hard and is overall inflationary.

There is respite in permanent lower business rates for retail, hospitality, and leisure properties from April 2026.

How ZEDRA can help

Our team of UK experts have considerable experience in providing global expansion advisory and compliance services for internationally headquartered companies and owner managed businesses.
To find out more please contact one of our dedicated team such as Stuart McLuckie, Adam Wildbore or Mark Pashley.

Disclaimer: Nothing herein shall constitute legal, tax or investment advice of any kind and ZEDRA accepts no liability for any reliance placed on the contents herein which are solely included for the purposes of marketing ZEDRA’s service offerings. Advice should be sought from appropriately qualified advisers to assess the suitability of any solution to your specific circumstances.