The Chancellor opened her Budget with a striking line:
“Half of new jobs in Britain are created by scale-up businesses.”
Founders would be right to expect a Budget designed to make it easier to start, hire and grow. Instead, most measures increased the cost of doing exactly that.
As Churchill put it (excuse the male orientated language):
“To tax a nation into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.”
A neat summary of the disconnect between the rhetoric and the reality of this Budget.
Here is what changes for small business owners.
1. Extracting profits is getting more expensive
Dividend tax rises by 2 percentage points from April 2026.
With the dividend allowance fixed at £500, the classic low-salary + dividends approach delivers less net reward year on year.
The measure increases “the ordinary and upper rates of tax on dividend income by 2 percentage points from April 2026. There is no change to the dividend additional rate.” In simple terms dividends will now be taxed at 10.75% and 35.75% with the additional rate remaining at 39.35%.
This was justified because National Insurance is not due on these earnings but completely overlooks the fact that, for owner managed businesses these dividends are paid after corporation tax has already been charged. We now see a scenario where more than 50% of earnings is taken in tax.
If you want to grow as an entrepreneur, please come and talk to us about our mentoring services and how we can guide your business future.
2. Hiring costs continue to rise
- Employer NI remains at 15%
- NI thresholds frozen (annual stealth tax rises)
- Minimum wage increased again
Obviously, nobody can complain about paying staff fairly but the burden to do so is falling on employers and they are being hit with a 15% surcharge every time pay is increased (in addition to pension contributions).
3. Senior training pathways have narrowed
It was announced in the budget that the government will “fully fund SME apprenticeships for eligible people under 25.” On the face of it this appears welcome but funding for level 7 apprenticeships is being withdrawn from January 2026, which restricts the ability to develop high quality skills/people in scale ups and without those future leaders, growth becomes more challenging. It might be that we can expect more detail on this policy – U turns have been known!
4. Some investment incentives – useful but incremental
There was some tinkering with capital allowances designed to reduce the tax benefits of existing assets and encourage investments in new assets but often tax policy is only one aspect in these decisions, speak nothing of sustainability! Most small companies will be unaffected as the annual investment allowance remains unchanged.
EMI schemes have been expanded to “increase the employee limit to 500, the gross assets test to £120 million, and the company share option limit to £6 million from April 2026. The maximum holding period will increase to 15 years including in respect of existing EMI contracts.”
Venture Capital Trust (VCT) and Enterprise Investment Scheme (EIS) – The government will increase the VCT and EIS company investment limit to £10 million, and £20 million for Knowledge Intensive Companies (KICs) and increase the lifetime company investment limit to £24 million, and £40 million for KICs. The gross assets test will increase to £30 million before share issue, and £35 million after, from April 2026. Alongside this, the VCT income tax relief will decrease to 20%.
5. OBR growth forecasts: slow, fragile, and far below historic norms
The Office for Budget Responsibility (OBR) delivered a sobering backdrop to the Budget:
- The UK’s growth forecast has been downgraded.
- Growth is expected to remain weak for several years, well below the long-run average.
- Productivity growth remains stagnant.
- Business investment is projected to be muted, despite capital allowances.
- Real wages recover only gradually.
- And despite tax rises, the public finances leave little room for future stimulus.
To put it bluntly: the OBR does not believe this Budget will significantly accelerate growth.
For founders, this means:
- demand will remain unpredictable.
- labour markets stay tight.
- costs remain elevated.
- and any improvement in productivity must come from inside the business, not from macro tailwinds.
6. A quick tip on salary sacrifice
There has been a lot of noise about changes to salary sacrifice, but it is worth cutting through the headlines.
The restriction applies to discretionary employee sacrifices – the classic example being high earners diverting bonuses into pensions to avoid National Insurance. That is the behaviour the reforms are aimed at.
But for most small businesses, the practical implication is far more straightforward: you can still structure your pension scheme with 0% employee and, for example, 8% employer contributions, and it remains entirely workable. Employers can continue to pick up the full contribution, and there are multiple permissible “tiers” within auto-enrolment, including definitions based on basic pay.
As ever, structure matters – and good planning matters even more.
Summary
While the budget is sobering, all things happen in cycles, and we stand at a moment in time. I would encourage you to focus on those things that are in your control, operational efficiency, digital transformation, cost and margin management, diversification, growing market share and international expansion where it fits your strategy.
A quick note on structure: LLPs are back on the radar
With rising dividend taxes, frozen thresholds and weaker exit reliefs, LLPs are becoming a viable alternative for some service-based firms.
Not a universal fix – but worth exploring where:
- profits are mostly extracted each year.
- the business is people-heavy, asset-light.
- flexible profit-sharing matters.
- external equity investment is not required.
An LLP avoids the double tax of company + dividend and can materially improve net take-home in certain cases. As always, we are here to help!