Budget 2025 – what did and didn’t happen to corporate taxes?

There was more speculation prior to Wednesday's Budget than any other Budget in years. Rumours of corporate (and other) tax changes fed newspaper headlines for weeks. We saw the impact of this in our work. Many clients raced against the clock to buy or sell prior to Budget day. Their haste was understandable, given the same-day CGT increases of last year's Budget. It turns out this haste was unnecessary (but the concern was very understandable).

While headlines were grabbed by sober facts (tax as a percentage of income now hitting record levels), many might agree that the Budget included few tax revelations. Income tax (on employment earnings) saw no increase across the board. VAT rates did not go up. The headline corporation tax and CGT rates remain unchanged. The question remains whether we might see a further need for tax raises in 12 months, as tax revenues continue to fail to meet public spending requirements.

So, what has happened? We set out below some key changes (relevant to corporate clients), together with a few words on how we think this could impact our clients.

1. Enterprise Management Incentive

Enterprise Management Incentive ("EMI") options allow an option holder to benefit from CGT, as opposed to income tax, on the growth in value of shares between the option grant date and the option exercise date. Coupled with the employer company retaining a corporation tax deduction for this growth in value, they are arguably the most attractive form of employee incentivization. Such a valuable tax relief is closely protected by conditions, and Ms Reeves has eased many of these. Companies can now engage twice as many employees (now 500) before falling outside the qualifying criteria, companies can have four times the gross assets (£120m) and the limit on share value that can be issued under EMI has increased from £3m to £6m. Options can now remain within the EMI scheme for 15 years as opposed to 10.

Our view:

This is a very welcome change for smaller businesses. Inflation inevitably means the thresholds effectively decrease over time, and these changes more than counteract that.

Smaller companies already face challenges retaining and motivating employees when competing with larger rivals. A small tech business is unlikely to have the package of benefits, enviable office, and CV clout of an employer such a Google, and it can make it hard to recruit and retain the best employees. What these companies do have however (more so than Google) is potential, and EMI options allow employers to share that potential with the employees, at no up front cost, allowing them to benefit in the same way founders do. A tech start up just might be the next unicorn, and an EMI option can attract employees by offering the uncapped upside the founders are motivated by.

EMI options are already hugely popular with those companies who can benefit from them, we anticipate these changes will open the door to granting EMI options to larger businesses (though they do still need to ensure they satisfy the myriad conditions that remain, and do not inadvertently lose the tax advantages through bad drafting).

2. Dividends

The Budget announced that the rate of income tax on dividends (but only the basic and higher rate, not the additional rate) is to increase by 2%.

Our view:

Many business owners extract profits via dividends as opposed to a salary. It is common to take a small salary (within the personal allowance, and to qualify for state pension entitlement) and the balance as dividends. The choice between salary and dividends is not as straightforward as comparing the income tax rates. Salary payments entitle the company to a corporation tax deduction, and salary payments incur NICs. This all needs to be weighed up. We shall give an example below:

A company has £1,000 profits to pass to its shareholder and sole employee. For the sake of this example we will assume the company is liable to 25% corporation tax and the employee is a higher rate taxpayer. If paying a dividend, the company would suffer 25% corporation tax (reducing the cash available for distribution to £750) and the individual would pay 35.75% income tax on that sum, walking away with £481.88. If paying salary, the company could pay £869.57 in salary, which would cost it £1,000 after adding employer NIC. It would suffer no corporation tax. The employee would walk away with £504.35.

In this scenario, with a 25% corporation tax charge and a higher rate taxpayer, the effective tax rates are now as follows:

We anticipate businesses will need to recalculate whether shareholder employees would find it more efficient to extract profits via salary or dividends.

3. Pension contributions

From April 2029 pension contributions made via salary sacrifice by employees, above a £2,000 threshold, will attract employee and employer NICs.

Our view:

This is, once again, a tax on working people. It is inaccurate to consider solely an employee's salary when looking at what working people earn, you should instead look at the cost to the business. A £1,000 payment to an employee might incur £150 employer NICs and a £50 employer pension contribution. £1,000 of salary costs the employer £1,200 in this example. From April, however, the cost to the employer will increase further and the benefit to the employee will decrease. The employee will not receive the full £50 in their pension (due to employee NICs) and the employer will have to pay a further £7.50 in employer NICs (assuming the £2,000 threshold has been used already).

Employers will face a choice. Either absorb these costs (reducing profitability), increase customer charges to fund the additional tax, reduce salaries, reduce pension offerings, or reduce future pay rises.

We anticipate reducing future pay rises or reducing pension contributions are the two most likely solutions business might choose. Customers may not be willing to pay more for the goods or services, and pay reductions could lead to employees leaving.

The long lead in time means there is plenty of time for this proposal to change; however, the April 2029 implementation date may be close to an election date, which could cause a rethink of the policy.

4. Venture capital changes

The following changes have been made to the venture capital schemes from April 2026

• The gross assets test will increase to £30 million immediately before the share issue and £35 million immediately after, (previously £15m and £16m respectively)
• The company annual investment limit will double to £10 million
• The company’s lifetime investment limits will double to £24 million
• The rate of VCT income tax relief will decrease from 30% to 20%.

Our view:

Again, on the whole this is a welcome change, particularly for scaling businesses seeking private investment.

The reduction in the rate of income tax relief for VCTs may mean that after a flurry of investment before April, the amount of capital invested in VCTs reduces.  That said, many investors look to venture capital schemes for their capital gains tax advantages as much as the income tax reducer, so VCTs may continue to be popular.

Changes to reduce the complexity of EIS relief would have been welcome, as this can deter companies and investors for utilising the relief, but with good advisors on hand these can be navigated.

5. Employee Ownership Trusts

A sale to an Employee Ownership Trust ("EOT") is no longer free from CGT. Instead, a 50% rate will apply (ie 12%).

Our view:

We anticipate this will be catastrophic to the popularity of EOTs. Psychologically, the difference between "no tax" and 12% CGT is huge. The new rate of CGT is higher than the old rate of CGT paid by those claiming entrepreneurs' relief (which used to attach to the first £10m of gain).

Those selling to an EOT have to contend with certain difficulties compared to those selling to a trade buyer. Typically a sale to an EOT will see the sellers paid out over several years, from profits of the business after sale. Classically the up front payment might be roughly a year's profit, and (if, say, the sale price was roughly 8x profits) it might take around seven years to pay off the balance.

If consideration equalled £8m (and assuming a negligible base cost), a seller might receive £1m on day one, but owe £960k in CGT. Once he or she has paid their costs associated with sale, a seller might not receive any cash at all. They then have to wait twelve months before receiving a further payment, during which time the EOT controls the company (and there is a risk the business could falter, or even fail). We fear these changes will mean many buyers will be unwilling to take this risk, and we expect EOT popularity to (sadly – as EOTs are unique in their benefits for employees) diminish.