Chancellor Rachel Reeves delivered a much-anticipated Budget - we break down the measures announced and what it all means for your finances.
Article last updated 3 December 2025.
After 12 weeks of speculation, we finally have clarity. Rachel Reeves’ latest Budget announcements have introduced a series of changes that, while subtle on the surface, carry significant implications for business owners, investors, and families planning for the future.
Although headline tax rates remain largely unchanged, the detail within the Budget reveals important considerations for financial planning and business strategy.
Dividend tax
Dividend taxes will increase by 2% from April 2026. Basic-rate taxpayers will now pay 10.75%, while higher-rate taxpayers will pay 35.75%. The additional rate of dividend tax will remain at 39.35%. This change will affect business owners who rely on dividends for regular income or pay themselves in dividends.
This has prompted questions about whether dividends remain a tax-efficient way to extract profits, compared with paying yourself a salary. The answer, for now, is ‘yes’. For lower-rate taxpayers, dividends are still more tax-efficient than drawing a salary. Even with the uptick, the net tax benefits of dividends outweigh those of employment income, particularly when factoring in national insurance contributions on salaries. It’s a good idea for business owners to review their remuneration strategies but avoid knee-jerk reactions, as dividends remain a cornerstone of efficient profit extraction for many.
Frozen tax thresholds
One of the most impactful measures is the extension of frozen tax bands for three additional years, through to April 2031. While rates are unchanged, inflation and wage growth will push more taxpayers into higher tax bands over time. This is widely regarded as a stealth tax because the government collects more revenue without increasing headline rates - a subtle but powerful form of ‘fiscal drag’. For individuals and families, this means the real value of allowances will erode, so proactive adjustments to long-term cash flow and retirement planning are essential.
Business relief
Rachel Reeves announced a particularly significant enhancement to Business Relief, especially for business owners concerned with succession and inheritance tax planning. From April 2026, any unused portion of the £1mn allowance for the 100% rate of Business Relief (or Agricultural Relief) can now be transferred to a surviving spouse or civil partner. In practice, this means that if someone doesn’t use their full allowance during their lifetime (perhaps because their qualifying business or agricultural assets are worth less than £1mn) the remaining allowance won’t go to waste. Instead, it can be transferred to their spouse or civil partner, giving them a bigger relief when inheritance tax is calculated on their estate.
The change applies even if the first partner passed away before the new rule comes into effect. This offers families greater flexibility, ensuring the full benefit of the relief isn’t lost if it isn’t fully used on the first partner’s passing.
This reform is especially relevant for owners of family businesses and SMEs, as it provides more certainty and control over the transfer of business assets across generations. The core features of Business Relief remain unchanged: qualifying business assets are still eligible for 100% relief. But the new rules for spousal transferability mean that families can better manage their inheritance tax exposure and support the continuity of their businesses. This update reflects the government’s continuing commitment to supporting enterprise and family business succession, while also making the system fairer and more adaptable to people’s real-life circumstances.
Venture Capital Trusts
Another headline development in the Budget was the expansion of eligibility for Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS). Historically, these schemes have been vital in channelling investment into early-stage businesses, but the Budget has widened their scope to support companies beyond the start-up phase. SMEs at various stages of their growth journey will now have greater access to ‘patient capital’ – long-term support by investors happy to wait for a strong return. This will enable them to scale operations, invest in innovation, and compete more effectively.
The government’s intention is clear: to make the UK the best place to start, scale up, and stay in business, and to ensure that promising companies aren’t forced to look overseas for funding as they mature. However, it’s important to note that while the annual and lifetime investment limits for VCTs and EIS will increase, the upfront income tax relief for VCTs will fall from 30% to 20%. This adjustment is designed to balance the incentives for investors while encouraging longer-term support for high-growth businesses.
National insurance contributions
The Chancellor also introduced a cap on national insurance contribution (NIC) relief for pension salary sacrifice arrangements, set at £2,000 per employee per year from April 2029. Currently, salary sacrifice schemes allow employees and employers to make pension contributions without paying NICs, offering a valuable tax advantage.
Under the new rules, contributions above £2,000 will be subject to both employer and employee NICs at the standard rates: 8% for earnings below £50,270 and 2% for earnings above this. For SMEs, this change will primarily affect those with employees making larger pension contributions via salary sacrifice. This could increase employment costs and lessen the overall benefit of these schemes.
Finally, another notable reform for business owners is the reduction in capital gains tax (CGT) relief for disposals to Employee Ownership Trusts (EOTs), which will fall from 100% to 50%. EOTs have become an increasingly popular succession planning tool for SME owners, allowing them to sell their business to employees without incurring CGT. The reduction in relief is a response to the rising cost of the scheme and the fact that larger transactions benefit disproportionately. The incentive for employee ownership remains, but business owners considering this route will need to reassess the financial implications and timing of any planned transitions.
