Impact of October 2025 UK Budget on small businesses 

The October 2025 UK Budget introduces significant changes that affect small businesses, with adjustments in wages, tax rates, and allowances

Here, Help to Grow: Management alumnus and Adaptive Accountancy Director Brad Walker evaluates the introduction of changes within the government’s October 2025 Budget, assessing potential benefits and challenges for small businesses in the immediate and long term. 

Wage increases 

Summary 

The minimum wage has been raised across all age brackets, with: 

• Over-21s wage increased to £12.21 per hour (6.7% rise). 

• 18–20-year-olds wage increased to £10.00 per hour (16.3% rise). 

• 16–17-year-olds and apprentice rates increased to £7.55 per hour. 

Challenges 

• Increased operating costs: small businesses may struggle to absorb these wage increases, particularly those in low-margin industries. This may lead to higher prices for consumers or reduced profit margins. 
   
  It’s imperative that small business look at their staffing costs and calculate the anticipated impact and assess whether any changes need to be included within their pricing models. 
   
  It’s times like these that having an accountant that is more than just a number cruncher becomes vital to help you navigate that process. 

• Cash flow pressures: for businesses with limited cash reserves, the wage hike may require adjustments to cash flow management, potentially impacting expansion plans or leading to reductions in hours or hiring. 
   
  If you don’t already have a cashflow forecast in place, now is the time to create one! 

National Insurance (NI) adjustments and employment allowance 

Summary 

• Employer NI contributions: rise by 1.25% to 15%. 

• NI threshold: Reduced from £9,100 to £5,000. 

• Employment allowance: increased from £5,000 to £10,500, allowing qualifying small businesses greater relief from NI costs. 

Potential benefits 

• Increased employment allowance: doubling the employment allowance could help small businesses offset the increased NI costs, making it easier to maintain or grow their workforce. 

• Incentive to hire: With the employment allowance cap raised, small businesses may find hiring additional staff more financially viable, which could support growth 

Potential challenges 

• Increased NI costs: while the raised employment allowance will provide relief, the higher NI rate and reduced threshold increase costs per employee, potentially reducing funds available for reinvestment. 

• Pressure on margins: for businesses not qualifying for the full allowance, the increased employer NI contributions may eat into profit margins. 

It’s difficult to determine how these changes will impact small businesses at an individual level as it will be dependent on the number of staff and their salary levels. Make sure you include this topic in your next discussion with your accountant. 

Add it into your cashflow chats! The additional costs of employer team members need to be factored in, otherwise you’ll be the one taking the pay cut. 

Capital gains tax and business asset disposal relief 

Summary 

• Capital gains tax: increased from 10% to 18% for lower rates and from 20% to 24% for higher rates. These are taking effect immediately. 

• Business asset disposal relief: lifetime limit maintained at £1 million, but tax rate to rise from 10% to 14% in 2025, and 18% in 2026. 

Potential benefits 

• Stable disposal relief lifetime limit: Keeping the lifetime limit at £1 million could encourage continued investments by small business owners planning to eventually sell, allowing some relief from the increased rates. 

Potential challenges 

• Increased tax on business sale profits: the rise in capital gains tax and disposal relief rates will reduce the returns for owners selling their businesses, potentially deterring investment or succession planning. 
   
  If you don’t have a succession plan in place, you should take this as a warning to put one in place. 

• Reduced cash for reinvestment: with higher tax rates on business sales, owners may have less capital to reinvest in new ventures or expansions. 
   
  Bear in mind that capital losses can’t be carried backwards. Therefore, it is possible to make a large gain one year, large loss the next, and this may result in an overall loss position AND have a tax bill. 

VAT, fiscal drag, and frozen income tax thresholds 

Summary 

• VAT: remains unchanged, maintaining current rates. 

• Fiscal drag: income tax thresholds are frozen, pushing more small business owners into higher tax brackets over time. 
   
  Do not underestimate this for fancy financial jargon, it’s a big stealth tax! 

Potential benefits 

• No VAT increase: maintaining VAT rates offers stability, especially for businesses reliant on consumer spending, such as retail and services. 
   
  Even though the threshold for VAT was recently increased to £90,000, many businesses avoid this threshold to maintain competitiveness on pricing especially when dealing with B2C. 
   
  Equally though, it’s important to understand the impact of putting a ceiling on your business revenue. 
   
  Speak with your accountant to run the numbers on how this works in practice, the answer may surprise you. 

Potential challenges 

• Increased tax burden due to fiscal drag: as income rises with inflation but thresholds stay frozen, more small business owners may fall into higher tax brackets, impacting disposable income and reinvestment capacity. 

• Inflationary pressure on consumer spending: fiscal drag on individual taxpayers may reduce overall consumer spending, potentially decreasing demand for goods and services from small businesses. 

Inheritance tax and property tax 

Summary 

• Inheritance tax thresholds: maintained at £325,000 until 2030, and unspent pension pots to be included within the estate from 2027. 

• Stamp duty land tax (SDLT): increased to 5% for second homes, effective immediately. This may have a profound impact on the buy-to-let markets of property investment 
   
  Additionally, careful tax planning will need to be sought when looking at transferring properties, from individual names to companies for example. 

Potential challenges 

• Increased inheritance tax on pensions: including inherited pensions in taxable estates could raise the inheritance tax liability, impacting family-owned businesses seeking generational continuity. 
   
  Be careful if you are in the farming industry, as the exemptions of inheritance tax are going to be made less generous from 2026. 

• Higher SDLT on second properties: for businesses investing in property (such as buy-to-let), the increased SDLT on second homes adds to acquisition costs, potentially limiting expansion. 

Corporation tax and investment allowances 

Summary 

• Corporation tax: Capped at 25%. 

• Annual investment allowance: set at £1 million, with ‘full expensing’ retained to encourage capital investments. 

Potential benefits 

• Investment incentives: the high Annual Investment Allowance and full expensing provisions provide strong incentives for capital investment, benefiting businesses needing to upgrade equipment or infrastructure. 
   
  Just be wary of carelessly claiming capital costs under the full expensing method vs other more generous capital allowance schemes. Discuss this with your accountant in case it impacts you. 

Potential challenges 

• Corporation tax cap at 25%: although capped, the relatively high corporation tax rate may limit profitability for small businesses 
   
  While this is a low corporation tax compared to some countries in Europe, the more globalised we become, the more attractive tax havens such as Dubai become for service-based businesses. 

Conclusion 

The 2025 Budget presents a mixed outlook for small businesses, with some beneficial elements but significant challenges. 
 
Key benefits include the higher employment allowance, stable VAT rates, generous investment allowances, and predictability around tax caps and thresholds. However, increased employer NI costs, higher capital gains and property taxes, and fiscal drag pose potential challenges, especially for businesses with limited cash flow or those reliant on high consumer spending. 
 
Small businesses will need to adapt by managing wage pressures, leveraging tax reliefs, and exploring strategies for mitigating inheritance and capital gains tax impacts. 

Please ensure you discuss how these things will impact your business with your accountant, as the saying goes, ‘They’re worth their weight in gold’.

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