UK Autumn Budget 2025 Review
There was a lot of speculation around the Autumn 2025 Budget, particularly about whether we would see big tax rises across the board. In the end, the Chancellor stepped back from that. The headline income tax and VAT rates remain where they are, but the dial has been moved in other places.
From April 2026, for example, dividend tax will rise by two percentage points, broadly to 10.75% at the basic rate and 35.75% at the higher rate. From 2027, savings and rental income will also be taxed more heavily in separate, ring-fenced bands. All of the government’s policies in the budget sit against growth forecasts of around 1.5% a year and inflation expected to stay above target, which is why there was so much anticipation that this Budget would have to turn the dial on revenues somewhere and speculation of where that may be.
From a legal and commercial perspective, these shifts change how many owner-managed businesses think about profit extraction. As dividend tax rises, directors and shareholders are likely to revisit how returns are taken out of the business. Companies and individuals in owner-run firms may decide to lean more on salary, bonuses or long-term value growth, rather than regular dividends. That in turn raises questions for shareholder agreements that build in fixed or formulaic dividend policies, and for director service contracts that assume a particular mix of pay and profit share.
There is also an international dimension. Higher effective tax on shareholder returns can cool investor appetite, particularly where investors are comparing opportunities across jurisdictions. We may see some foreign investors looking more closely at other markets if their net returns in the UK are squeezed, which could have a knock-on effect on fundraising and exit options for growth companies here.
These changes also interact with the equity culture that has been developing in the UK market, especially around EMI schemes and other management incentive structures. Higher dividend tax rates may make regular dividends on employee-held shares slightly less attractive at the margins, and some employees may prefer to focus on salary or cash bonuses in the short term rather than relying on dividend flows. That all follows on from the direction set over the past couple of years: capital gains tax was increased in the Autumn 2024 Budget, and the earlier rise in corporation tax to 25% has now been locked in for this Parliament.
Taken together, the story for SMEs and owner-managers is less about one dramatic tax change and more about a gradual tightening of how returns are taxed. The legal questions now are whether existing shareholder documents, service contracts and incentive arrangements still fit comfortably with that new reality.
