Analysis
The Chancellor’s first Budget targeted the cost-of-living crisis, with targeted support for small businesses and entrepreneurs. As expected, many small measures were announced rather than sweeping reform, which means that further detail will emerge over the following days.
The impact on private individuals
Entreprenurs – BADR and Founders’ Relief
In the spirit of giving with one hand and taking away with the other, a further reduction of Business Asset Disposal Relief (BADR) was announced, with the relief being limited to £500,000 (down from £1m) from April 2027. The reduction will mean a BADR claim will effectively save £30,000 of capital gains tax.
The original version of BADR, Entrepreneurs’ Relief (introduced in 2008), provided a lifetime allowance of £1m and a rate of tax of 10%. The lifetime allowance was gradually increased over the years to £10m, before being reduced again. The further reduced allowance of £500,000 is the lowest it has ever been, and much less valuable.
In contrast, a new relief, Founders’ Relief, will be introduced from April 2027, following a consultation process. This relief will allow taxpayers to access a 10% capital gains tax rate, with a lifetime allowance of £10m of qualifying capital gains. Sounding familiar? Maybe, but the proposed definition of “founder” is more stringent than a qualifying individual for the purposes of BADR.
Broadly, as proposed, a qualifying individual for the purposes of Founders’ Relief will need to own at least 25% of the ordinary shares, have held at least 25% from the outset, have held the shares for at least five years, and have been UK resident for at least five consecutive years prior to the date of the disposal.
Only companies within the scope of UK corporation tax will qualify. Furthermore, as proposed, the company itself must meet two of three tests for the individual to qualify for the relief. These cover turnover (average compound growth of 25% from a minimum of £10 million), headcount (average annual compound growth of 25%, from a minimum 15 employees), and innovation (£1.5m of qualifying expenditure on research and development).
Compared to the broader BADR requirements, the new relief sets a higher bar for founders to grapple with.
The proposed qualifying conditions are subject to consultation and so may change before becoming law. However, it is clearly targeted at individuals who strive to scale their businesses.
Timely payments in income tax self-assessment
Following consultation earlier this year, HMRC published the summary of responses and next steps today. In the consultation, it was proposed that self-assessment tax liabilities would be collected via PAYE, or through reforms to the payment on account system. This prompted a strong response insofar as the practicality and implementation is concerned.
The issue is that a tax liability for a particular tax year may not be paid until around 22 months after the end of that year. This creates a cash-flow disadvantage for the Exchequer and a cash-flow advantage for some taxpayers. However, it can be difficult to find a lump sum to fund a tax liability long after the income has been received, so paying the tax closer to when the income is earned may be preferable.
HMRC have announced that those already within the payment on account regime will have to make automated ‘in-year’ payments on account via direct debit. This will be the default position with the option to make payments via PAYE if the individual is eligible. The objective is for individuals to make more regular and smaller payments through the year rather than larger payments some time after the income has been received. There will also be the ability to forecast income to adjust the payments on a timely basis.
The changes will be implemented from April 2029.
Savers and property investors – further changes to income tax rates
From April 2027, income tax will increase by a further 2% for property and savings income:
| Savings and property income – basic rate | 24% |
| Savings and property income – higher rate | 44% |
| Savings and property income – additional rate | 49% |
Compared to the current rates of 20%, 40% and 45% for non-savings/property income, this is a steep increase and arguably a further disincentive for savers and landlords.
ISAs
Further changes to ISAs were announced, with confirmation that the cash ISA allowance would remain at £20,000 welcomed. LISAs (Lifetime ISAs) will be replaced by a new FTB ISA (First-Time Buyer ISA) from April 2029. Existing LISA’s will continue with penalties reduced where savers buy a house at more than the cap. It would still seem that the penalties will be punitive, but savers will at least now be able to get back what they put in. There will be a consultation on a new ISA for first-time savers.
Who remembers the British ISA proposal? This was scrapped with the intention of simplifying the ISA regime, but the objective of simplification may not be met by the current government.
MTD for Income Tax
Hidden away in the notes, it has been confirmed that taxpayers joining MTD for the first time from 6 April 2027 (that is, individuals with property and/or rental income in excess of £30,000 based on their 2025/26 tax returns) will benefit from an extension to the “soft landing” in respect of late filing penalty points. This is a welcome adjustment while taxpayers get used to the requirements of MTD. Furthermore, it seems the current exemption for non-residents will also be extended until further notice.
Non-doms and the FIG regime
Buried in the detail of the Budget, the Government has committed to “…continue to assess whether the residence-based regime is striking the right balance between international competitiveness, fairness and support for the public finances – and has shown its willingness to take action to ensure that balance is best achieved.”
This approach is welcomed, with some hope provided to internationally mobile individuals that tweaks to the current regime may yet be on the agenda soon.
Reverse Hybrid consultation outcome
The outcome to the consultation over the summer has now been published. A tax credit regime is favoured – as opposed to reverse hybrids (e.g. US Limited Liability Companies) being treated as tax transparent for UK tax purposes.
The proposal is to permit a claim for a credit for any foreign taxes suffered (either by the individual, or the entity itself) against the UK tax liability arising when a distribution is made. Subject to a further consultation, this could be implemented from early 2028. Watch this space.
The impact on businesses
Business taxes
Were the announcements today regarded as too little, too late, or will the measures incentivise much needed economic growth? Time will tell.
Today’s Budget has been positioned as ‘breathing space’, which is probably a fair description for most businesses. Although headline rates remain unchanged, there were several measures aimed at growth and regional investment.
Corporation tax
The 25% main rate and 19% small profits rate are set to remain for the financial year beginning from 1 April 2028.
However, corporation tax surcharge on banking business is set to increase by 3 percentage points to 6% for 15 months from 1 January 2027. This is the budget for the working people, with banks taking part of the hit.
The government has also published a consultation seeking views on how the overall corporation tax administration system can be simplified to improve certainty and support investment, growth and competitiveness. This is a welcome move for many businesses facing an ever-increasing administrative burden.
Capital allowances
Whilst full expensing remains, the main-rate first-year allowance rises from 40% to 50% from 1 January 2027. However, the main-rate writing-down allowance falls from 14% to 12% from 1 April 2027. Whilst this is largely a timing difference, businesses planning significant capital expenditure should consider when it is incurred.
Foreign permanent establishment (PE) exemption
As expected, the foreign permanent establishment (PE) exemption regime will become mandatory, simplifying the previous regime. The changes will take effect for corporation tax accounting periods beginning on or after 1 January 2027.
Research and development (R&D) tax reliefs
The government will introduce legislation to remove the requirement to submit a Claim Notification Form for R&D claims made on or after 1 April 2027. The government will also simplify the information required in the Additional Information Form for companies that claim R&D tax relief from autumn 2027. It’s a welcome change for many businesses who are still grappling with these requirements.
Business rates
Retail, hospitality and leisure businesses in England will benefit from higher small business rates relief thresholds (rising from £12,000 to £18,000) and an additional 20% relief for pubs, social clubs, and live music venues from 1 April 2027. It is hoped that this will bring some life back to our high streets with an estimated 70,000 businesses taken out of the business rates system altogether.
Final thoughts
Overall, this was a broadly encouraging Budget that should provide businesses with some stability, while placing greater emphasis on investment, entrepreneurship and longer-term growth. A number of wider measures and consultations were also announced, and we await further detail on their overall impact on businesses.
More information
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