Last week saw the second Budget by the Labour Government, much of which did not come as a big surprise. Not all the announcements made will apply directly to you, so below we have broken down the main points and their likely impact on your business:
Income tax and national insurance
- Although there was no increase to the rates of income tax and national insurance applied to earnings, the thresholds the rates apply to has been frozen for a further three years until 2031. This will mean that as people’s earnings increase the thresholds will not move with them, resulting in more people paying a higher rate of tax sooner – known as ‘fiscal drag’.
- The thresholds for employer national insurance contributions will also be frozen, which as above will mean employers will be paying more NI sooner as wages increase.
- The amount someone under 65 can put into a cash individual saving account (ISA) will be reduced to £12,000 per year from 2027, with the rest of the £20,000 allowance reserved for investments. This cap does not apply to those over 65.
- The ordinary and upper tax rates applied to dividends will increase by 2% points from April 2026, and on all savings income from April 2027. So individuals will be paying 10.75% and 35.75% (increased from 8.75% and 33.75%) for the ordinary and higher rates of tax on dividends. There is no change to the dividend additional rate, and they will continue to pay 39.35%.
- From April 2027 the extra 2% tax payable on property and savings income will mean paying tax at 22%, 42% and 47% for basic, higher and additional rate bands respectively, (up from 20%, 40% and 45% respectively). The relief you receive on interest payments will also be adjusted to 22%.
Corporation tax
- Although there was no change to the rates of corporation tax, there is a large increase in penalties for filing corporation tax returns late, applying to returns with a filing date of 1 April 2026 onwards. The penalties have not been increased since 1998 so their impact has been reduced by nearly 30 years of inflation. All the penalties will be doubled so the £100 fine for filing late will double to £200, the £200 fine for filing more than three months late doubles to £400, and so on.
- The capital allowances for new assets that fall in the main rate pool will be reduced from 1 April 2026, down from 18% to 14%, although the £1million annual investment allowance remains in place, so most smaller and medium sized businesses will not be affected.
Wages and salaries
- The training for apprentices under 25 will be made free for small and medium sized companies. This is one of the few good points for businesses in the Budget but it is not yet clear how it will work in practice as more information is awaited.
- Minimum wage is set to increase, meaning a pay boost for millions. From April, workers aged 21 and over will see a minimum wage rise to £12.71 an hour, up from £12.21. For those aged 18, 19 or 20, minimum wage will rise to £10.85 an hour, up from £10. For 16 and 17 year olds, it will rise to £8 an hour, up from £7.55.
Pensions
The amount of a person’s pay that can be paid into a pension scheme and avoid national insurance contributions – often called ‘salary sacrifice’ – will be capped at £2,000 from 2029.
Other points
- Electric vehicles (EVs) will be subject to a per mile charge that will be encompassed within the annual DVLA road tax charge from April 2028. It is estimated that most EVs will pay around half of what an equivalent non EV would pay.
- For the 2026/27 tax year, Income Tax Self-Assessment (ITSA) taxpayers who are required to join Making Tax Digital (MTD) will not face late-submission penalties for the quarterly updates due to be filed, a temporary measure designed to ease the transition for taxpayers adapting to the new digital reporting system.
- From 6 April 2027, the government will apply a new penalty regime for late submission and late payment to all ITSA taxpayers who are not already required to join MTD. The updated rules will be enacted via secondary legislation.
- The Office for Budget Responsibility (OBR) believes that the economy will grow by 1.5% this year, up from 1% originally forecast in March. However, it also pointed out that not a single measure in the budget will have an effect on what was already predicted.
- The Institute for Fiscal Studies (IFS) says that households face a ‘truly dismal’ increase in living standards, with the average disposable income rising by just 0.5% over each of the next five years. From the mid 80s to the mid 2000s this was consistently more than 2% each year.
General consensus is that it was not a great Budget from a business’ point of view so time will tell if it has the desired affects.