The 2025 UK Autumn Budget: What it means for SMEs and their people

Rachel Reeves has delivered the 2025 budget – and for SMEs, it brings another round of changes that will affect your costs, your hiring plans, and how you manage your people.

Last year's budget already pushed up some of your biggest expenses thanks to higher employer National Insurance and a significant National Living Wage rise, and payroll updates added admin to an already full plate.

The British Chambers of Commerce's Quarterly Economic Survey, which tracks mood across 4,600 businesses (most of them SMEs), recently found that confidence dropped back to its 2022 low following the previous budget - and it hasn't recovered.

This year's announcements will hit some businesses harder than others, depending on your sector and setup. Yes, it adds pressure. But with a few months to prepare, you can plan ahead and stay in control.

We've broken down what's coming, what it means in practice, and what you can do to stay on top of it.

2025 UK Autumn Budget - key takeaways at a glance:

• National Living Wage to rise from £12.21 to £12.71 an hour from April 2026 (up 4.1%)
• Income tax and NI thresholds will remain frozen until 2030–31
• Business rates reform from April 2026 lowers rates for retail and hospitality
• Corporation tax allowances tightened from April 2026
• £2,000 salary sacrifice pension cap introduced from 2029
• SMEs could benefit from new funding to support apprenticeship training for under-25s

How will the 2025 budget affect SMEs?

“These measures do little to offset the huge tax hikes that these employers were hit with in April 2025. Nor will they help ease the costs that lie ahead. As new Employment Rights take effect, 63% of SME bosses say they will be disproportionately impacted by the costs of implementing the changes. 

All this risks leaving British businesses hanging in the balance. SMEs account for 99.9% of the UK business population, and deserve financial support and guidance that matches up to the huge value they represent for our economy and communities – more than what they got today.” 

- Phil Coxon, Managing Director at Breathe

For employers, six headline changes stand out from this budget. These are the ones most likely to shape your costs, influence your hiring plans, and affect how you run day-to-day operations in the months ahead.

Some will create immediate pressure on your wage bill. Others will change how you think about benefits, investment, or compliance. All of them deserve your attention now, so you can plan accordingly.

1. National Living Wage to rise from £12.21 to £12.71 an hour from April 2026 (up 4.1%) 

The National Living Wage is going up again. From April 2026, anyone over 21 will earn at least £12.71 an hour (up from £12.21), while 18-20 year olds will see their minimum wage jump from £10 to £10.85 an hour.

What this means for SMEs

If you employ anyone currently paid below these new rates, your payroll costs are going up. Businesses with a lot of under-21s will feel it most.

And if you're already managing the impact of April 2025's National Insurance increase and the new employment rights changes, margins will get tighter.

What HR teams should do now

• Understand the cost impact as soon as you can: work out which roles and departments will be most affected by the April 2026 increase, and get a clear picture of what it means for your budget. 
• Review your pay bands and differentials: when the minimum wage goes up, you need to make sure the gap between your lowest and next-lowest paid roles still makes sense, or you risk squeezing pay differences and causing frustration across the team. 
• Check your staffing plan and rota patterns: if your current setup only works at today's wage rates, now's the time to adjust before April rolls around. 
• Prepare your managers to talk about it: internal comms matter here. Make sure your line managers understand what's changing and can explain it confidently. 
  
  

Reality check: If you employ five full-time workers at National Living Wage, the increase to £12.71 an hour adds roughly £4,800 a year to your wage bill. Once Employer National Insurance is factored in, the real cost rises to around £5,400 per year.

2. Income tax and NI thresholds will remain frozen until 2030-31

Income tax thresholds are staying frozen until 2030-31. The personal allowance sits at £12,570, the higher rate threshold at £50,270, and the additional rate at £125,140.

As wages rise over the next few years – whether through inflation, National Living Wage increases, or pay reviews – more of your employees will be pulled into higher tax bands. Their gross pay might go up, but their take-home won't keep up because more of it gets taxed at a higher rate.

National insurance thresholds for employers are frozen until 2030-31, meaning rising wages also push up employer NI at the same time.

What this means for SMEs 

This creates a tricky dynamic for salary conversations. You might give someone a pay rise that looks meaningful on paper, but once higher-rate tax kicks in, it won't feel as significant in their bank account.

That gap between what you're spending and what employees actually gain can make retention and motivation harder to manage.

What HR teams should do now

• Be transparent in pay conversations: when discussing pay rises or promotions, help managers explain the tax impact clearly so employees understand why their take-home might not match expectations. 
• Review your total reward offering: if salary increases deliver less value due to tax thresholds, consider whether benefits like pension contributions, flexible working, or professional development could add meaningful value without the same tax hit. 
• Plan salary review with tax bands in mind: when you're modelling pay increases for 2026 onwards, factor in where employees sit relative to tax thresholds so you can make informed decisions about how much extra someone actually takes home. 

The £50,270 squeeze: the higher-rate tax threshold of £50,270 is where these threshold freezes will bite hardest for many SME employees. When someone moves from 20% to 40% tax on everything they earn above that threshold, a £3,000 pay rise suddenly feels a lot smaller.

3. Business rates reform from April 2026 lowers rates for retail and hospitality 

If you run a retail, hospitality, or leisure business, there's some relief coming your way. Business rates are set to fall for smaller, customer-facing businesses, while larger offices, warehouses, and big retail sites will pay more.

The 2026 revaluation could still push some bills up depending on your property values, but one-year increases will be capped through transitional relief. That should soften the blow if your rates do climb.

What this means for SMEs

Smaller businesses with physical premises open to the public are likely to see some relief. But if you operate from larger spaces – particularly warehouses or offices – your fixed costs could rise.

The Government is essentially redistributing the burden, shifting it away from high streets and onto space-heavy operations.

What HR teams should do now

• Factor revised business rates into your workforce and site planning for 2026 onwards: if your rates are going up, you'll need to account for that in your budgets. 
• Be cautious about long-term hiring or expansion plans tied to physical locations that may become more expensive: it's worth modelling the potential impact before committing to growth plans that depend on fixed property costs staying manageable. 

“Lower rates will offer some relief for retail, hospitality, and leisure businesses. Small businesses will also benefit from the transitional relief scheme, which will cap bill increases following revaluations due in 2026, and funding for under-25 apprenticeship training."

- Phil Coxon, Managing Director at Breathe

4. Corporation tax allowances tightened from April 2026 

The headline corporation tax rate isn't changing, but the Budget includes a reduction in main rate Writing Down Allowances (WDAs). That means less tax relief when you invest in plants, machinery, and equipment.

The Government expects this change to raise £1.5 billion by 2029–30, which tells you how many businesses this will touch.

What this means for SMEs

If you're a manufacturer looking to upgrade machinery, a logistics company needing new vehicles, or a tech business investing in servers and hardware, the after-tax cost of that investment just went up. The asset itself costs the same, but you'll claw back less through tax relief, which makes the real cost higher.

Some businesses will respond by slowing their upgrade cycles or pushing major purchases forward before April 2026. Others may shift towards leasing rather than buying outright, simply because the tax case for ownership has weakened.

What HR teams should do now

• If your growth plans rely on new equipment, coordinate with finance on revised investment timings: you may want to bring forward purchases before April 2026, or adjust your plans to reflect the higher post-tax cost. 
• Consider how equipment decisions might affect hiring or training plans: if investment becomes more expensive, it could influence decisions about headcount, particularly in roles that depend on specific tools or technology. 
  
  

The reality for asset-heavy SMEs: This increases the cost of growth without touching the headline tax rate. If your business needs regular capital investment to operate or expand, you're looking at tighter margins on every purchase.

5. £2,000 salary sacrifice pension cap introduced from 2029

This one doesn't kick in until April 2029, but it's worth flagging now. From that date, salary-sacrificed pension contributions above £2,000 a year will no longer be exempt from Employer National Insurance. Employers will pay NICs on the portion above that threshold.

Previously, all salary sacrifice pension contributions were exempt from Employer NICs, making them a tax-efficient way to boost retirement savings.

What this means for SMEs 

Salary sacrifice schemes become more expensive to run at higher contribution levels. For businesses that offer enhanced pension contributions as part of their benefits package, the tax efficiency just got weaker.

That doesn't make salary sacrifice worthless, but it does reduce the advantage for both employer and employee once contributions cross the £2,000 threshold.

What HR teams should do now

• Review your current salary sacrifice arrangements and identify any staff contributing above the £2,000 threshold: you need to know who'll be affected and by how much. 
• Work with your accountant or finance team to forecast the future Employer NICs cost: model what this will mean for your total benefits spend from 2029 onwards. 
• Assess whether your scheme structures need updating before 2029: some SMEs may cap salary sacrifice contributions, switch to alternative benefits, or redesign pension schemes altogether to manage the additional cost. 
  
  

Planning tip: this change may push some SMEs to cap salary sacrifice contributions, switch to alternative benefits, or redesign pension schemes altogether. You've got time to plan, so use it.

6. New apprenticeship funding for under-25s

The Budget includes new funding to support apprenticeship training for under-25s. If you're an SME looking to bring on young talent, this makes it cheaper to hire apprentices and invest in their development.

This is a genuine opportunity to build capability in your business while keeping costs manageable. Apprenticeships let you develop the exact skills you need, create clear progression paths for younger team members, and bring fresh energy into your workplace, all while benefiting from financial support that makes the investment more affordable.

What this means for SMEs

Apprenticeships let you develop skills in-house while keeping salary costs lower than hiring experienced staff. With funding, the cost of training drops, which makes apprentices a more attractive option if you're trying to grow your team without stretching your budget too far.

It's particularly useful if you're in a sector where skills are hard to find or expensive to recruit. Instead of competing for experienced candidates at higher salaries, you can train someone from scratch and shape them to fit your business.

What HR teams should do now

• Look into what funding you're eligible for: apprenticeship funding structures can be confusing, so check what's available for your business size and sector - it might be more generous than you expect. 
• Identify roles that could work as apprenticeships: not every position suits an apprentice, but junior roles in admin, customer service, digital marketing, tech, or operations often do. Map out where apprentices could add real value. 
• Build a proper training plan: apprenticeships only work if you've got the time and structure to support someone's development. 
• Factor apprenticeships into your hiring strategy: if you're planning recruitment for 2026, weigh up whether some roles could be filled by apprentices. 
  
  

What does an apprentice actually cost?

Apprentices earn at least the apprentice minimum wage (£8.00 per hour from April 2026), though many SMEs pay more to attract good candidates.

For a full-time apprentice, you're looking at roughly £16,000–£20,000 in salary for the first year, depending on the role and your sector.

Factor in about an hour a week for supervision and check-ins, plus time from an experienced team member to help them learn on the job. This will be your main investment beyond salary.

What else did Labour's 2025 Budget include?

Beyond the six headline changes, there are a few other announcements worth noting. They won't affect every SME, but depending on your sector and setup, some could have a real impact on your business:

• Dividend tax rises: dividend tax rates will rise by 2%, increasing the personal tax bill for directors and shareholders who take income via dividends. If you're a limited company owner paying yourself partly through dividends, this will reduce your take-home pay.
• Fuel duty freeze: fuel duty is frozen until September 2026, protecting short-term costs for mobile and logistics-based SMEs. But higher rises are locked in from 2027 onwards, so this is temporary relief rather than a long-term fix.
• Ride-hailing VAT change: from January 2026, VAT changes from margin rates to full fare for ride-hailing and private-hire vehicle businesses, increasing costs that will need to be absorbed or passed on to customers.
• HMRC VAT enforcement tightening from 2026: stricter compliance checks, faster debt collection, and reduced tolerance for late payments mean higher audit risk for all SMEs.

How HR teams can stay on top of these changes

The good news is you've got a few months to get your house in order. The businesses that handle this well will be the ones that start planning now rather than scrambling in March 2026. Here's where to focus:

• Review the changes with your leaders and identify what needs updating: go through the announcements that affect your business specifically and flag what needs action, from payroll adjustments to benefits reviews.
• Check your staffing and salary plans: if National Insurance, minimum wage rises, or pension changes affect your costs, now's the time to model the impact and adjust your hiring or pay structures accordingly.
• Update internal guidance: make sure your policies, handbooks, and manager resources reflect the changes coming in 2026 and beyond. Out-of-date guidance creates confusion and compliance risk.
• Check payroll and HR systems to ensure changes are applied correctly: when April 2026 rolls around, your systems need to be ready. Work with your payroll provider or software to confirm everything's configured properly.

• Make a plan to brief managers: your line managers will be the ones fielding questions from their teams. Equip them with clear, confident answers about what's changing and why.

These changes don't exist in isolation. Between the National Living Wage rise, higher National Insurance costs, and the Employment Rights Bill coming into force, SMEs are facing a significant increase in the cost of employing people.

The challenge is working out how they all stack up together and what that means for your business in practical terms. That's where planning makes the difference.

Plan your next steps with confidence.

In addition, get a clear breakdown of everything changing in employment law this year and beyond, with Breathe’s 2026-2027 employment law e-book.

FAQs

Q: When do the main Budget changes for SMEs take effect?

A: Most changes begin between April 2026 and April 2029, with key changes to the National Living Wage, VAT rules, business rates, corporation tax allowances, and pension salary sacrifice rules phased in over that period.

Q: Will the 2025 Budget increase payroll costs for small businesses?

A: For many SMEs, yes. The National Living Wage rise to £12.71 from April 2026, alongside existing National Insurance pressures, means a significant number of employers should expect higher wage bills over the next two years.

Q: Does the VAT clampdown affect all SMEs?

A: Not directly. A VAT increase mainly affects transport, travel, and ride-hailing businesses, but all SMEs are likely to face stricter VAT enforcement, including faster penalties and reduced tolerance for late payments.

Q: Which businesses benefit most from the business rates changes?

A: Retail, hospitality, and leisure businesses are most likely to benefit from lower rates from April 2026, while large offices, warehouses and high-value sites may see higher costs.

Q: How will the corporation tax allowance changes affect investment?

A: From April 2026, tax relief on equipment, machinery, and plant will reduce, making it more expensive after tax for SMEs to invest in physical assets and technology.

Q: What is the new £2,000 salary sacrifice pension cap?

A: From April 2029, employers will pay National Insurance on salary sacrifice pension contributions above £2,000 per year, reducing the tax efficiency of higher pension contributions.

Q: What should HR teams prioritise after the 2025 Budget?

A: HR teams should prioritise modelling wage impacts, checking payroll system readiness, reviewing staffing plans against rising costs, and preparing managers to clearly communicate upcoming changes to staff.