The Chancellor of the Exchequer presented her Budget 2025 to Parliament on Wednesday, 26 November. The Chancellor’s roadmap reinforces a move away from reliance on fossil fuels and focuses instead on clean and ‘modern’ technologies.
The destination of growth and innovation is clear, but the route is anything but straightforward. So, what should we be thankful for from the changes widely trailed in the press (and briefly leaked before she stood up to deliver the speech)?
The headline Rachel Reeves wanted to deliver was that the budget was fully costed and that the government would not need to raise income tax, national insurance, or VAT. So far, so good. The Office for Budget Responsibility took a different view and said that the tax increases outlined in the budget will bring “the tax take to an all-time high of 38 per cent of GDP in 2030-31″. Ouch.
As ever with these things, the ‘truth’ is the detail.
First things first, no change to the Corporation Tax rates, which are, as the Chancellor reminded everyone, the lowest in the G7.
Capital Expenditure
Full expensing is staying, so if you buy qualifying assets, you get full relief in the year that you acquire them. If you buy assets for leasing, then you will benefit from an all-new first-year allowance (FYA) of 40%, which is “to encourage investment where those FYAs were not previously available”. It’s not all good news for capital expenditure, though: the writing-down allowance (WDA) on the main pool of plant and machinery is cut from 18% to 14% per year, reducing the amount of relief you can claim each year. The next question is, when will this change take effect? Well, why have a single effective date when you can have three:
The new FYA will be available for expenditure incurred from 1 January 2026.
The new rate of WDA will be effective from:
- 1 April 2026 for businesses within the charge to Corporation Tax
- 6 April 2026 for businesses within the charge to Income Tax
For businesses whose chargeable period spans 1 April (Corporation Tax) or 6 April (Income Tax), a hybrid rate will have effect.
Where are we going?
According to the Budget documentation, the UK’s economic future relies on leading-edge innovation in AI, life sciences, clean energy, advanced manufacturing, and creative industries (all very modern!). In reality, this means that certain sectors are receiving more intensive support than others.
Automotive Manufacturing – a further £1.5 billion to support the development of UK capability in next generation, zero emission technology. DRIVE35 (Driving Research & Investment in Vehicle Electrification) is a £2.5 billion programme of capital and R&D funding for the automotive industry, including £500 million to 2035 to extend R&D support for 10 years.
UK-registered businesses can apply for grant funding for large-scale capital investments in the manufacture of zero-emission vehicles and their supply chain components, including:
- vehicle assembly
- upgrading or establishing new plants
- batteries, including gigafactories
- electric motors and drives
- power electronics
- fuel cells
- upstream supply chain
- recycling
Closely related to this, from 2028-29, it is proposed that there will be a new mileage tax for electric vehicles equal to 3p per mile for battery electric vehicles and 1.5p per mile for plug-in hybrid vehicles. An annual mileage of 8,000 miles would therefore generate a Vehicle Excise Duty charge of £240 – it is not yet clear how this will be measured or collected.
At what cost?
The minimum wage and the national living wage will rise in April next year. The national living wage, the minimum an employer must pay staff aged 21 and over, will rise by 4.1% – from £12.21 to £12.71 an hour. From April 1, 2026, the national minimum wage for workers aged 18 to 20, which is currently £10 an hour, will increase to £10.85.
In addition, the Chancellor confirmed a significant change to pension salary sacrifice arrangements. From April 2029, any salary-sacrificed pension contributions above £2,000 per year will no longer be exempt from National Insurance contributions. This will affect both employers and employees, potentially increasing costs for those using salary sacrifice as part of their remuneration strategy. Businesses should review their current arrangements and plan ahead to mitigate the impact.
In positive news, the government announced funding for training for under-25 apprenticeships to be completely free for small and medium-sized enterprises.
Finally, if all this is too much and you are late filing your Corporation Tax return, then the penalty for this will increase.
Exit Planning
The lifecycle of a manufacturing business quite often results in a management buyout or a third-party sale, or, more recently, in capital gains tax-free disposal to an Employee Ownership Trust. Whilst this is still the case, one of the Budget announcements is that, effective immediately, the capital gains treatment for shares sold to an Employee Ownership Trust (EOT) is changing. Capital Gains Tax relief on disposals to EOTs will be reduced from 100% to 50%, meaning half of the disposal value will now be treated as a chargeable gain.
This gain will be taxed without the benefit of business asset disposal relief or investor relief, and as such will result in sellers suffering a blended rate of 12% on their disposal. Whilst not as beneficial as before, a disposal to an Employee Ownership Trust should continue to be considered alongside other disposal strategies such as an MBO or third-party sale.
Have questions?
If you’d like to understand how these changes could affect your business or your employees, or if you want to explore strategies to maintain tax efficiency, contact BHP’s tax team today. We can help you assess the implications, model potential costs, and identify opportunities to optimise your approach in light of the new rules.
