Latest tax reforms that entrepreneurs and SMEs need to know about

While last year’s Autumn Budget saw Labour stick to their plans to not increase income tax rates, national insurance and VAT for individuals, the brunt of the tax changes made will be felt by entrepreneurs and SME’s, writes Patrick King, Tax Partner, MHA.

The tax changes announced by Chancellor Rachel Reeves, dealt a triple blow to entrepreneurs and SMEs with increases in employers’ national insurance, national minimum wage and an absence of any corporate tax cuts.

SMEs rely on tax stability when making decisions around investments and expansion, so the announcements will have left many feeling uneasy and forced to reassess future plans in view of the considerable tax bills that could arise.

Class 1 Secondary National Insurance

The biggest impact for many SMEs is the 1.2% increase to Class 1 Secondary National Insurance contributions to 15%, coupled also with the reduction in the threshold at which it will begin to apply from £9,100 to £5,000, both of which will take effect from 6 April 2025.

The above changes are estimated to cost businesses an additional £615 in national insurance for every employee earning above £9,100.

In addition to this, the national minimum wage is set to rise from April 2025, with the new rates being £12.21 per hour for 21 and over, and £10.00 per hour for 18–20-year-olds.

The apprentice rate has also increased to £7.55 per hour. This results in the estimated average cost of employing someone on national minimum wage increasing by 10%.

The employment allowance which can be deducted from Class 1 secondary national insurance liabilities has increased from £5,000 to £10,000, with the £100,000 threshold also being removed. Whilst this will cover the national insurance costs of a business employing four full-time workers on national minimum wage it does little to soften the blow for employers with large staff numbers.

The hike in employers’ staffing costs will leave many SME’s re-evaluating their recruitment plans and future pay rises.

Capital Gains Tax

The main rates of capital gains tax, which apply to assets other than residential property, have increased from 10% and 20% to 18% and 24% respectively with these increases taking effect for disposals made on or after 30th October 2024.

The lifetime limit on business asset disposal relief (BADR), which is available on a sale of shares in a personal trading company, remains unchanged at £1 million.

The rate of capital gains tax applicable to disposals which qualify for BADR will remain at 10% for disposals up to 5 April 2025. Thereafter the rate will increase to 14% for disposals in 2025/26, and 18% for disposals on or after 6th April 2026.

When introduced, BADR could result in tax savings of up to £1m, with effect from 6 April 2026 this will have dwindled to tax savings of a maximum £60,000.

The delay in the introduction of the capital gains tax rate increases for BADR could see entrepreneurs accelerating their decisions to sell or liquidate their companies.

Inheritance Tax

Whilst changes to inheritance tax were widely anticipated, the changes announced were not as significant as many expected. However, as with many other changes announced, it was business owners and farmers that were largely targeted by the changes.

The headline change was the introduction of a limit on the maximum value that could qualify for 100% business property relief (BPR) and agricultural property relief (APR). Previously certain assets that qualified for BPR or APR could have 100% of their value free from inheritance tax.

From April 2026, there will be a combined £1m allowance available for business and agricultural assets. Any value in excess of £1m will attract a 50% relief, giving an effective IHT rate of 20%. The £1m limit applies to every individual, however any unused allowance cannot be transferred to a spouse on death contrary to other inheritance tax reliefs.

Business owners will now need to consider their inheritance tax exposure and revisit their Wills to ensure they are fully utilising this relief. Thankfully, there were no changes to the seven-year period for lifetime gifts, meaning business owners need to consider lifetime planning to avoid hefty inheritance tax liabilities that could place extra financial pressure on their businesses and families.

Consultations are expected to take place in April 2025 on the changes to BPR and APR, which could result in further changes to the reliefs.

Added to this the Chancellor also announced that from April 2027, most unused pension funds and death benefits will be included within the value of an individual’s estate and subject to 40% inheritance tax. The result being that if an individual dies after 75 this could result in a double tax charge. The change could also result in the loss of any residence nil rate band and hence at an effective tax rate of up to 70.5%. Previous advice about pensions may now be significantly different.

Corporation Tax

For corporation tax it was very much business as usual with very small technical changes announced. The corporate tax roadmap was announced with the aim of providing a stable and predictable environment following years of change. It is confirmed that the headline rates of corporation tax, annual investment allowance, full expensing and R&D tax credit rates will all remain unchanged, providing welcome certainty for businesses. It is hoped that this will build the confidence needed to attract investment and bring economic growth.

What does this mean for me and my business?

Unfortunately, the Autumn Budget did not bring about much certainty or good news for entrepreneurs and business owners. The hike in employers’ national insurance leaves business owners with difficult decisions to make between recruitment and pay rises for existing members of staff.

Business owners will no doubt have to reconsider their business activities going forward and their personal succession plans.

If you would like to talk through any of these changes, please get in touch with our tax specialists.

You can find out more about our firm and our services on our website: www.mha.co.uk or contact us by email: [email protected] or call: 01628 955915 Thames Valley Office: Foundation Park, Maidenhead SL6 3UD