The Autumn Budget 2025 lands at a defining moment for the UK economy. After five years marked by a pandemic-induced contraction, a rapid but uneven rebound, a cost-of-living crisis and the highest inflation rate in four decades, the latest Office for Budget Responsibility (OBR) forecasts suggest that the UK is finally settling into a period of stability – albeit one characterised by subdued growth and persistent structural challenges.
For SME founders, this Budget and the accompanying OBR outlook offer more than just new tax rates or policy announcements. Together, they provide a roadmap for the economic environment your business will operate in over the coming years. Understanding this backdrop is essential to making decisions around hiring, pricing, remuneration, investment and expansion.
This article takes a look at the broader economic picture before breaking down the latest measures that matter most to small and medium-sized businesses.
Economic landscape: What the OBR forecasts tell us
Inflation stabilising near the 2% target
After several years of inflation volatility, the OBR expects inflation to steady at just under 2% by 2027. This is a notable shift from the highs of 2022–2023, when inflation climbed above 10% and drove significant increases in wages, input costs and interest rates. A return to near-target inflation provides SMEs with something they have not had for some time: predictability. This stability should make medium-term budgeting, supplier negotiation and pricing strategy considerably more reliable.
GDP growth recovering but remaining modest
The OBR projects real GDP growth to average around 1.5% this fiscal year, which is up from its previous forecast of 1%. However, in historical context, this represents a stabilisation rather than the growth the Chanceller is seeking, signalling a return to steady but restrained economic expansion.
For SME founders, this means the economic environment will be stable enough to support long-term planning but not strong enough to fuel automatic increases in demand. Business growth will depend heavily on differentiation, smart investments and expansion, customer value and operational efficiency – not on favourable macroeconomic winds.
Productivity remains the UK’s achilles heel
The OBR has once again revised productivity growth downward. This is part of a long-running trend: the UK has struggled with low productivity since the financial crisis and the gap continues to widen compared to international peers. Weak productivity constrains wage growth, limits investor confidence and caps the economy’s potential.
Key tax measures affecting SMEs and business owners
Taxation is central to this year’s Budget, not through sweeping overhauls, but through targeted shifts that meaningfully affect business owners.
Corporation tax remains stable but requires planning
The corporation tax regime is unchanged. Profits up to £50,000 are taxed at 19%, while profits above £250,000 fall into the 25% rate. Between these thresholds, companies benefit from marginal relief, which gradually increases the effective tax rate as profits rise. This stability is helpful for founders forecasting multi-year investment, but it also places greater emphasis on proactive tax planning to ensure profits are extracted efficiently and reliefs are fully utilised.
Dividend tax increases narrow the gap between dividends and salary
One of the most significant changes for business owners is the increase in dividend tax rates. From 2026, dividend tax will rise by 2 percentage points across all bands. This means basic-rate taxpayers will pay 10.75% on dividends above the £500 allowance, while higher-rate taxpayers will pay 35.75%. The decision reflects a broader government intention to narrow the perceived inequity between labour income and investment or shareholder income.
For SME founders, this will reduce the attractiveness of dividend-heavy remuneration strategies. Many will need to revisit their mix of salary, dividends, pension contributions and other extraction methods in line with these changes. Support from an accountant is strongly recommended here.
New caps on salary sacrifice pension tax relief
From April 2029, the Budget introduces a new cap on how much pension saving can benefit from National Insurance relief via salary sacrifice, limiting the NI free element to £2,000 per person per tax year. For founders and senior team members who currently use large salary sacrifice contributions as a tax efficient extraction tool, anything above this cap will start to attract employee and employer NICs, reducing the net benefit and potentially increasing payroll costs.
It will still be possible to pay in more than £2,000, but owners will need to revisit their mix of salary, bonuses, dividends and pension contributions, and model the post 2029 NI impact with an adviser to avoid unpleasant surprises.
Fiscal drag continues with frozen income tax thresholds
Income tax thresholds remain frozen with a freeze extension to 2031, meaning wage rises, whether driven by inflation, minimum-wage increases, or promotion, will push more individuals into higher tax bands. For directors who pay themselves a salary, this effectively increases their tax burden even without any change in tax rates. For businesses, this creates upward pressure on wages as employees seek to offset their rising effective tax rates.
VAT remains unchanged
The standard VAT rate stays at 20%, with no movement on the reduced 5% rate or the zero rate. The VAT registration threshold also remains unchanged. While not headline-grabbing, this stability is welcome, particularly for those close to the threshold who have been hoping for reform or uplift.
Capital Gains Tax (CGT) stability supports longer-term planning
Capital Gains Tax has not been altered in this Budget. The standard rates therefore remain at 10% for basic-rate taxpayers and 20% for higher-rate taxpayers, with higher rates applying to residential property. For business owners, particularly those planning an eventual exit or share disposal, this stability is helpful—but it also means there is no new relief to support disposals. Business Asset Disposal Relief (BADR) remains critical for founders expecting to sell part or all of their companies.
Minimum wage increases and labour costs
The government confirmed that from April 2026, the National Living Wage for workers aged 21 and over will increase to £12.71 per hour. This is an important rise that will significantly affect labour-intensive sectors, including hospitality, retail, care, logistics, cleaning and warehousing.
The impact will not be limited to minimum-wage roles. When the lowest pay band increases, businesses often face pressure to raise wages across the entire structure, as employees seek to maintain pay differentials. This wage cascade effect can substantially increase overall staffing costs.
For many SMEs, the rise will accelerate efforts to restructure teams, introduce automation, streamline operations and explore alternative staffing models.
Business rates reform
From April 2026, business rates for smaller high-street premises in retail, hospitality and leisure will be permanently set using new, lower multipliers for properties with rateable values under £500,000, while a new higher multiplier will apply to large sites worth £500,000 or more.
This shift is designed to support high-street businesses that have faced rising costs and declining footfall, while asking logistics-heavy businesses to shoulder a greater share of the burden.
For SMEs in consumer-facing sectors, this represents a meaningful reduction in fixed overheads. For e-commerce and distribution businesses, it may require a review of warehousing strategy, location and cost structure.
SEIS and EIS remain unchanged
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) remain untouched in this Budget. No new restrictions, eligibility changes, or alterations to relief levels were introduced. For early-stage businesses reliant on external investment, this continuity is significant.
The stability of SEIS and EIS will continue to attract angel investors and early-stage funding into the UK market. For founders, these schemes remain powerful tools for raising capital while managing dilution and investor expectations.
Capital markets: SDRT relief for UK listings
To strengthen the UK’s capital markets, the government is introducing Stamp Duty Reserve Tax (SDRT) relief for companies listing in the UK. While the immediate impact on most SMEs is minimal, this signals a longer-term intention to improve the competitiveness of the London Stock Exchange and encourage high-growth companies to remain in the UK rather than seeking overseas exchanges.
What this means for SME founders
Taken together, the OBR forecasts and Budget measures suggest that the next phase for SMEs will be defined by stability, not rapid growth. Inflation has eased, tax policy is tightening in specific areas, and wage pressures continue to rise. Growth will be possible, but it must be engineered through strategic decision-making rather than expected from the wider economy. For ambitious SME founders seeking rapid growth potential, looking internationally continues to be a compelling alternative to UK growth alone.
Founders should use this period to strengthen their financial foundations, revisit remuneration and extraction strategies, invest in technology and make deliberate choices around staffing, pricing and productivity.
The businesses that focus on efficiency, resilience and smart planning will be the ones that thrive over the coming years.
