Budget 2025 holds surprises for business leaders

Rachel Reeves presented a restrained Budget this week, raising £24 billion in taxes and increasing spending by £2 billion. Most of the new spending occurs upfront, while revenue measures take effect later. The most immediate adjustment for businesses was the shift to annual fiscal rule assessments, replacing the previous twice-yearly reviews. This change aims to stabilize markets, though the details included smaller adjustments that may alter costs, investment, and hiring practices.

Tax thresholds frozen, wage pressures mount

The main tax adjustment extended frozen personal income tax thresholds until 2031, a decision projected to cost taxpayers £56 billion through fiscal drag. While not a direct business tax, the freeze may affect payrolls. Employees facing higher marginal rates—levels unseen since the 1970s—could seek wage increases, adding pressure on employers already dealing with rising labor costs.

A previously announced 4.1% increase in the National Living Wage takes effect next year. Another change caps salary sacrifice pension contributions exempt from National Insurance at £2,000. Starting in 2029, contributions above that amount will incur both employer and employee NI at standard rates. The adjustment may discourage companies from offering pension top-ups beyond legal minimums, increasing payroll expenses.

Laura Mair, EY UK&I managing partner for tax and law, described the Budget as “relatively quiet” for business but highlighted growing strain. “Although the restriction of NICs relief for pension contributions given under salary sacrifice and the reduction in the main rate of capital allowances will add to company costs over time, and personal taxes may present challenges for consumer-facing sectors reliant on discretionary spending, this was a relatively quiet Budget for business.”

Corporation tax unchanged, but relief shrinks

The corporation tax rate remained at 25%, but changes to capital expenditure relief will effectively raise the burden. The main rate of “writing down” allowances for capital assets was reduced, a move consultancies warned would increase costs for businesses investing in equipment or property.

Related: BP boss faces daunting transformation challenge

Business rates underwent the most significant overhaul. The government introduced five new multipliers, with the highest—50.8p—applying to properties valued over £500,000. The goal is to shift the tax load from smaller retailers and hospitality businesses to e-commerce and logistics providers. The Office for Budget Responsibility projects a 5% revenue increase from business rates this year, though critics argue the changes will disproportionately affect London and the South East.

John Webber, head of business rates at Colliers, called the system “even more complicated” and warned of strain on high-street operators. “By this action, the government has effectively shifted the cost of this support from itself to UK plc, putting an even further strain on businesses across the board, and putting even further pressure on the high street since it is the big retail and leisure operators w

Investment incentives and share schemes

The Budget included measures to encourage investment, though some fell short of industry expectations. Venture capital trusts and the Enterprise Investment Scheme were expanded to cover more businesses, with funding limits doubled. However, tax relief for VCT investors was reduced. New London Stock Exchange listings will also be exempt from stamp duty reserve tax for three years, an effort to revive the City’s struggling IPO market.

A new Advance Tax Certainty service, launching next year, will allow investors in major projects (£1 billion or more) to receive early guidance on tax positions. FTI Consulting described it as a step toward addressing uncertainty that has stalled infrastructure projects, where unclear tax relief rules have created delays.

The most notable change for employee incentives expanded the Enterprise Management Incentive scheme. Previously limited to firms with under 250 employees and £30 million in assets, the program now covers companies with up to 500 employees and £120 million in assets. The aggregate limit for share options also doubled to £6 million.

Dominic Merlin-Cone, partner at Grant Thornton, called the expansion significant. “More businesses can now use tax-advantaged options to attract and retain talent,” he said. “It ensures one of the most favorable employee incentive schemes remains accessible to larger mid-market businesses.”

Related: China Q4 Growth Slows to 4.5% Meeting Target

Less popular was the reduction in capital gains tax relief for businesses sold to employee ownership trusts. The relief, once 100%, will drop to 50% due to the scheme’s soaring cost, which the government projects will exceed original estimates by 20 times by 2029. Experts said the cut was unlikely to deter sales to employee trusts, given the remaining tax advantages over conventional disposals.

Economic outlook and lingering uncertainty

The OBR’s forecasts painted a mixed picture. Growth is now projected at 1.5% annually from 2027, down from 1.8% in March, though productivity declines were less severe than feared. Reeves’ fiscal headroom could eventually boost Treasury income as wages rise, though the path remains uncertain. Questions persist about AI’s impact on employment and when consumer spending might rebound.

Andrew Harding, chief executive of the Chartered Institute of Management Accountants, called the Budget a missed opportunity. “It did not address spiraling public sector costs, an over-complex tax system, or the growing burden on businesses,” he said. “Addressing these would have built confidence to invest and improve productivity.”

The Budget highlighted how closely public spending, employment, and investment are connected. Marco Amitrano, senior partner at PwC UK, emphasized the importance of stability in the tax system. “When firms invest in technology and skills, productivity rises, creating fiscal headroom and reducing pressure for further tax increases,” he explained.

One measure received little attention from business leaders: a higher rate of air passenger duty on corporate private jets over 5.7 tonnes, effective 2027. For a small group of executives, this may be the most unpopular change.