Autumn Budget 2025: Small businesses braced for major tax hikes

Over the past few weeks, dozens of potential tax rises have been mooted in the press – from a possible increase in income tax, to a raid on pensions and a hike in dividend tax.

This article is now out of date. You can see the main points from the 26/11/25 Autumn Budget here.

In recent years, it’s become almost expected for the government to brief the mainstream press to test out how popular (or otherwise) future changes to policy will be. However, the level of briefing has surely reached a new peak – both at Rachel Reeves’ first Budget last year, and again ahead of the upcoming November Budget.

Everyone is likely to be affected in some way when the Chancellor delivers her statement on 26th November, but how are small business owners – sole traders and company directors – likely to be targeted, according to these briefings?

Income tax and allowances

Despite earlier assurances that the main rates of income tax would remain unchanged, reports now suggest a possible 2p increase in the basic rate is being considered as part of last-minute Budget discussions.

Even if this does not materialise, the existing freeze on tax bands and allowances is still expected to continue. When thresholds stay fixed while earnings rise, more people drift into higher bands each year. This “fiscal drag” has already become one of the most effective ways for the Treasury to raise revenue without formally changing the rates.

For the self-employed and small company directors, the result is the same: paying more tax on similar real incomes. Extending the freeze until 2029 now looks increasingly likely, lengthening what was initially billed as a short-term measure.

VAT – small business squeeze

VAT has been mentioned repeatedly in Budget speculation. While raising the main rate would risk fuelling inflation, adjusting the VAT registration threshold would achieve the same goal more quietly. The threshold has been fixed at £90,000 for years, and the government may now consider lowering it or linking it more tightly to turnover growth.

Any change here would bring thousands of small businesses into the VAT net, forcing them to register, charge VAT on their services and submit quarterly digital returns. A threshold drop to around £50,000–£60,000 would significantly increase compliance obligations for microbusinesses while bringing in steady revenue.

Even if the limit remains, further steps towards full digitisation of VAT and income records are expected, continuing the expansion of Making Tax Digital over the next two years.

Dividend tax – another possible hike

Dividend tax is one of the few areas where rates could be increased quickly without a direct impact on employees’ wages.

A report in the Telegraph today suggests a rise of up to four percentage points across all bands could be on the cards. This would take the basic rate to 12.75%, the higher rate to 37.75%, and the additional rate to 43.35%.

For limited company directors, that could mean hundreds or even thousands of pounds extra tax each year, depending on how much profit is taken as dividends. It would also continue a long-term trend: the tax-free dividend allowance has been cut from £5,000 when introduced in 2016/17 to just £500 today, eroding the tax advantage previously enjoyed by directors.

Pensions and savings

Pension tax relief is another likely target. Higher earners currently receive up to 40% relief on contributions, and this could be replaced with a flat rate closer to 30%. While this would simplify the system, it would also reduce incentives for directors and senior self-employed professionals to invest in their pensions through company contributions.

There has also been talk of capping the total amount of tax-advantaged savings someone can hold across pensions and ISAs combined. ISAs, which allow £20,000 of tax-free saving each year, may face tighter limits for very large balances. Such changes would be presented as fairer treatment of income from work versus income from investments.

Capital Gains Tax and property

Capital Gains Tax (CGT) could also be increased. Aligning CGT rates with income tax bands is often suggested as an easy way to raise billions while simplifying the system. This would be particularly significant for landlords and company shareholders, who could face rates of up to 40% or more on gains that are currently taxed at 20% or less.

We already know that Business Asset Disposal Relief (BADR) – the successor to Entrepreneurs’ Relief – will rise from 10% to 18% from April 2026. That confirmed change alone will significantly increase the tax cost of selling a business or shares, especially for small company owners planning an exit in the next few years.

Property remains politically sensitive, but a new “Mansion Tax” on high-value homes has been openly discussed in recent months, alongside the possibility of a future council-tax revaluation. While such changes take time to introduce, the groundwork could be laid in this Budget through consultation announcements.

Business rates and local taxation

Business rates continue to be one of the most significant fixed costs for physical premises. The government may choose to extend the current small business rate relief or temporarily freeze revaluations for 2026.

However, the overall direction seems to be towards a more locally controlled system, where councils retain a larger share of revenue – potentially leading to uneven outcomes for small firms depending on where they operate.

Stealth measures and more red tape

While most attention focuses on headline taxes, many of the most significant Budget changes are likely to be administrative rather than numerical.

Extending the freeze on allowances, phasing out small reliefs, and expanding digital reporting could all raise revenue quietly.

The next phase of Making Tax Digital for income tax is expected to be confirmed, along with tougher rules on digital record-keeping and online marketplace income.

ByteStart’s view

The November Budget comes at a difficult moment. Growth remains very weak, and public borrowing is skyrocketing.

Business owners are still reeling from the hike in employers’ national insurance, only to face another raft of tax increases barely seven months later.

The fiscal gap facing the Treasury is measured in tens of billions, yet the political appetite for large-scale tax rises remains limited.

The government has already ruled out increases in income tax, VAT and employee National Insurance – until very recently, when a possible two pence rise in income tax was suddenly floated.

In truth, income tax has been mentioned so often in recent weeks that it now feels firmly back on the table.

We could see both headline increases to the main taxes and a wave of smaller, less controversial rises elsewhere via threshold freezes and reduced tax relief.

“The government has boxed itself in,” says ByteStart editor, James Leckie. “If you take the three biggest taxes off the table, you’re left with a long list of smaller, less visible ways to raise money – but none of them come close to bridging the gap.”

That gap is likely to be filled through incremental alignment.

The Treasury appears intent on equalising how different types of income are taxed – closing the gap between salaries, dividends, savings and property.

“While the approach is politically safer than a single, dramatic rise, it could mean the self-employed and small company directors end up contributing more in practice – as they always do!”

Make sure you visit ByteStart on 26th November when we’ll publish the Budget key points and how small business owners are affected.

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