Budget 2025: How the Latest Tax Changes Are Threatening SME Business Survival

After months of speculation that had both markets and nerves shaking, Chancellor Rachel Reeves delivered her second Budget on November 26th, 2025. While the government frames this as a budget that “backs British business,” the immediate reaction from many owner-managed businesses will likely be one of concern. 

With £26-£30 billion in tax increases set by 2030-31, and economic growth forecasts downgraded for every single year from 2026 onwards, the Budget 2025 may prove to be the critical first domino to fall for businesses already operating on tight margins. Once it falls, it could trigger a cascading series of failures across the SME sector, with business insolvency the likely next outcome for many. 

Insolvency is not political, and neither is this blog. It is instead a practical assessment of the cash flow and viability pressures and realities now facing SMEs in the UK. At Inquesta, we are already seeing early warning signs from business owners who are questioning whether continuing is worth the escalating tax burden. If you are worried about what the tax changes could mean for your business, here is what you need to know:

The Dividend Tax Increase: A Direct Hit on Business Owners

From April 2026, dividend tax rates are rising by two percentage points across the board. The basic rate increases to 10.75%, and the higher rate is increasing to 35.75%. Chancellor Rachel Reeves framed this as a measure to target landlords, but the reality is that it will also hit every small business owner who extracts profits through dividends — which is likely the majority of owner-managed businesses in the nation. 

The typical SME structure often involves directors paying themselves a small salary, frequently just above the National Insurance threshold, and extracting the bulk of their income as dividends. This approach has always been regarded as more tax-efficient than if you were to take everything as a salary. However, with corporation tax now at 25%, and dividend tax increasing, the combined tax burden on business profits has never been more stark. 

Real-world Impact: A business owner extracting £60,000 in annual dividends can expect to pay approximately £1,200 more in tax each year. For somebody taking £100,000 in dividends, this figure rises to around £2,000 annually. 

While this may not sound catastrophic, this is money than previously may have been used for: 

• Reinvesting into the business to ride out slow periods. 
• Holding back as emergency cash reserves. 
• Supporting the business through temporary cash flow gaps. 

More worryingly though, owners with a smaller disposable income are now less able to prop up their struggling businesses with personal funds — something many SME owners have done to ease pressures throughout the last few challenging years. We are also seeing concerning behaviours where owners are extracting maximum dividends now and weakening the businesses’ working capital position rather than leaving funds in the business — to anticipate these tax increases — as well as any more that may come in the future. 

Warning signs to watch for:

• Directors extracting unusually high dividends relative to actual profits.
• A director may begin appearing noticeably less motivated and increasingly detached: slowing decisions and showing less enthusiasm for initiatives that once energised them.
• Working capital declining as owners prioritise personal tax positions over business stability.

Threshold Freezes: The Stealth Tax Crushing Real Incomes

While dividend tax grabbed headlines, the most damaging measure in this Budget is one that barely gets mentioned: the extension of income tax threshold freezes for another three years to 2031.

Dan Neidle of Tax Policy Associates calls fiscal drag “likely the largest overall tax increase from a single policy in the post-war period.” The Office for Budget Responsibility estimates it will raise £32 billion in 2026/27, climbing to £39 billion by 2029/30. To put that in context, that’s more than the entire foreign aid budget.

What This Means in Practice: Tax thresholds have been frozen since 2021 and will now remain frozen until 2031 — a full decade. As your business profits grow (even just keeping pace with inflation), you pay progressively higher effective tax rates on the same real income.

Someone earning £50,000 in 2021 will still face the same tax thresholds in 2028, despite seven years of inflation eroding the real value of that income. The £100,000-£125,000 “60% tax trap” — where the personal allowance disappears, creating an effective 60% marginal rate — now affects far more business owners than when it was initially introduced.

The insolvency risk stems from the fact that this can create a lack of incentive for companies to grow. Business owners are increasingly asking: “why should I work harder to grow my revenue if I’m going to lose 60% of it to tax?” We’ve seen plenty of cases over the years where viable and growing businesses have stalled because owners have lost the motivation to push forward while their own personal reward keeps shrinking. 

Consider a business with £500,000 turnover in 2021, growing at 5% annually (below inflation):

• By 2025, turnover has reached £607,000.
• The owner’s income has grown nominally, but the tax burden has increased disproportionately.
• Real income has actually fallen despite business growth.
• Result: the owner questions viability, reduces investment, and the business slides toward insolvency.

Pension Changes: Removing Your Financial Safety Valve

From April 2029, salary sacrifice into pensions will be capped at £2,000 before National Insurance applies. Above that threshold, contributions face both employer NI (15% on earnings under £50,270, 2% above) and employee NI (8% under £50,270, 2% above).

Why this matters: Many business owners have used salary sacrifice over the years to:

• Legally reduce their tax burden.
• Build retirement provision while running a business.
• Smooth income (taking less now, more in retirement).
• Avoid the £100,000 personal allowance trap.

This safety valve is being largely removed. Post-Budget, business owners face a stark choice: extract income and pay punishing tax rates, or leave profits in the business (increasing your personal risk if the business fails).

Insolvency implications we’re already seeing:

• Some owners are front-loading pension contributions before 2029, weakening current business cash positions.
• Others are questioning whether to continue at all. 
• Reduced personal financial resilience means owners are more vulnerable if their business does fail.

Our Advice: Review your pension strategy now, but be extremely cautious about extracting excessive cash from a business that may need that working capital to survive the coming economic headwinds.

Business Rates: Relief for Some, Pain for Others

The 2025 Budget announces permanent lower business rates for 750,000 retail, hospitality, and leisure properties. This will account for nearly £900 million saved annually from April 2026. There is also a £4.3 billion support package capping bill increases for sectors hit hardest by reevaluations. 

While this may sound overwhelmingly positive, these lower rates are funded by higher rates put onto properties worth over £500,000, targeting what Reeves called “warehouse giants”. However, this will not just impact global companies. It will also catch: 

• Professional services firms in city centre locations.
• Any business operating from high-value premises.
• London-based businesses where property values are inherently higher.

The Insolvency Angle: Retail and hospitality businesses get relief, but many are already so deeply troubled that rate relief alone won’t save them. Meanwhile, professional services firms — many of whom are profitable and employ significant numbers of people — face unexpected additional overhead costs.

We’re likely to see accelerated moves to remote or flexible working arrangements to avoid high-value property costs, and potential distortions in the commercial property market around the £500,000 threshold.

The Cumulative Burden: Why This Could Trigger an Insolvency Wave

The real danger stemming from the 2025 Budget isn’t any one measure — it is the cumulative effect each one can have. In the coming years, a typical owner-managed businesses can now expect to face:

1. Higher dividend tax (profit extraction more expensive).
2. Threshold freezes (fiscal drag reducing real income).
3. Pension changes (removing tax efficiency tools).
4. Potentially higher business rates (if in valuable property).
5. National living wage increases again (labour costs up 4.1%).
6. No meaningful growth support or investment incentives.

The Office for Budget Responsibility’s forecasts tell the story: economic growth has been downgraded for every single year from 2026 to 2030. Markets reacted calmly to the Budget because it “balances the books” — but that balance is achieved entirely by squeezing businesses and workers, not by driving growth.

Sectors most at risk:

• Retail and Hospitality: Despite rates relief, underlying consumer economics remain dire.
• Professional Services in High-Value Locations: Facing unexpected rate increases.
• Owner-Managed Businesses with £50,000-£150,000 Profit: Hit hardest by threshold freezes.
• Businesses Reliant on Consumer Discretionary spending: As disposable incomes are squeezed across the board.

Early Warning Signs Your Business May Be in Trouble

After years helping businesses through financial difficulty, we’ve learned that insolvency rarely happens suddenly. It’s usually a gradual deterioration that owners don’t fully recognise until after their options have narrowed significantly.

Cash flow warning signs post-Budget 2025:

• Difficulty maintaining previous dividend extraction levels.
• Owner considering extracting maximum dividends “while they can”.
• Reduced working capital reserves.
• Delayed or cancelled investment in equipment, staff, or marketing.
• Increasing reliance on personal funds to cover business shortfalls.

Behavioural warning signs:

• Regularly voicing fatigue over rising tax pressures.
• Discussions about “winding down” or taking early retirement.
• Reluctance to pursue growth opportunities due to tax implications.
• Considering aggressive restructuring to reduce tax (potentially risky arrangements).

Market warning signs:

• Customers delaying payments or reducing order sizes.
• Increased competition from desperate businesses slashing prices.
• Pressure to reduce your prices while your costs are increasing.
• Key suppliers tightening credit terms.

The danger is these issues will appear gradually, but by the time owners recognise them they are in serious trouble and their viable recovery options have often disappeared.

Why Early Intervention Matters  Now More Than Ever

The tax burden is at a 70-year high, with growth forecasts declining. For businesses already operating on margins, this Budget could be the tipping point. But early intervention makes all the difference between:

• Managed restructuring vs. chaotic failure.
• Controlled wind-down vs. forced liquidation.
• Rescuing the viable core vs. total loss.
• Orderly creditor treatment vs. damaging disputes.

At Inquesta, we understand both the technical insolvency processes and the real-world pressures facing business owners in this post-Budget 2025 landscape. We’ve guided hundreds of businesses through financial difficulty, and we know that the businesses that survive are almost always the ones that sought advice early.

If you’re a business owner concerned about whether your company remains viable in this new tax environment, speak to our team confidentially. We can help you understand your options moving forward. 

The businesses that make it through the next few years will be those that faced reality early and planned accordingly. Contact Inquesta today to find out more about what we can do to help you.