What owner-managed businesses need to consider now to be resilient in 2025
Friday, 31st January 2025By Emma Ball, Partner at Alexander & Co. Emma, who works with owner-managed businesses, highlights the actions businesses and their owners need to consider for the potentially turbulent year ahead.
Business owners may well be wondering what lies ahead in 2025. Whilst we are only just out of January, we know that the Autumn Budget resulted in many tax increases which will need navigating this year. To recap, these included:
- Increased National Insurance contributions for businesses
- The National Living Wage being increased
- Reductions in Business Property Relief and Agricultural Relief (from 2026, so planning is needed now)
- Business Asset Disposal Relief rate increase
- Several Capital Gains Tax (CGT) increases
- Inheritance Tax changes
- Abolition of the non-dom regime
The two most important changes for owner-managed businesses to navigate are likely to be the significant employer National Insurance increases and changes effecting inheritance tax/succession planning.
Businesses should plan now for the National Insurance and National Minimum Wage/National Living Wage increases in April. At the same time, for owner-managed and family-owned businesses, succession planning, taking into account the dramatic inheritance tax changes, should be reviewed as an urgent priority. These should be reviewed, even if they have been considered recently.
Increases to Employers’ National Insurance and Minimum Wages
In April, the National Insurance rate employers pay is increasing to 15%. Simultaneously, the secondary threshold, when employers start paying National Insurance, is being reduced to just £5,000. For employers, this is a significant increase in costs.
Higher costs per employer could result in a considerable impact for businesses on future investment and profits. One area likely to be affected is reduced pay increases.
The median salary in the UK is currently estimated to be £37,430. The April changes will increase the employers’ NIC contribution by £956 to £4,865.
This equates to an increase of 2.3% of the gross salary cost and, as inflation is currently 2.5%, those anticipating inflationary pay increases may end up dissatisfied. Revenue previously allocated for pay increases is likely to now be set against this tax increase.
The OBR estimates 76% of these NI increases will be passed on to employees via lower real wages.
The hospitality sector is one which is likely to be severely impacted by these changes. This is alongside the planned National Living Wage/National Minimum Wage increases.
Whilst the National Living Wage will increase by 6.7% for full time workers (equating to £1,400 a year), for 18 to 20-year-olds, the National Minimum Wage it is to increase by just over 16%. Whilst this appears to be good news for employees, this is a huge additional burden for businesses who are also faced with higher business rates and increasing product costs. Hospitality businesses are closing at an alarming rate, which is likely to continue this year.
What is evident is that, with employee costs increasing, coupled with continued financial pressures elsewhere, businesses need to be proactive in identifying where they can make cost reductions and increase profitable areas of their business in 2025.
Firms need to take immediate action to plan for changes taking effect in 2025. They should consider how the many rises in costs and taxes will affect them. For many, it will be beneficial to implement changes now, after undertaking business operation reviews.
Salary sacrifice may be an option to explore. This can provide a tax-efficient way for both employees and employers to reduce National Insurance contributions. It can be used for a range of options, including company cars and pension contributions. Here, it can assist employees increase their pension savings (or reduce overall car costs) and employers reduce their overall payroll costs, often with little effect on an employee’s take home wage.
With higher taxes, rethink your inheritance tax and succession planning strategies
Inheritance tax (IHT) is to change to a residence-based system, which differs from the existing system. When the full details are published this may offer scope for some UK domiciles who become non-resident to be excluded from elements of UK inheritance tax.
From April 2027, inherited pension pots alongside death benefits are to be subject to inheritance tax. More significantly, substantial reductions to Business Property Relief and Agricultural Relief are set to rise from April 2026 (more details on this below). We urge all business owners to review their succession planning and inheritance tax strategies.
Again, a fresh review of succession planning and inheritance tax planning can be vital.
Business Property Relief and Agricultural Property Relief
Business Property Relief alongside Agricultural Property Relief is being significantly reduced from April 2026. The existing relief will only continue at 100% for the first £1 million (of combined business and agricultural assets). This is on top of existing nil-rate bands (which are now frozen until 2030). Only 50% relief will then be available after the first £1 million. AIM shares are to be restricted to 50% relief, which will be on all their value.
If an individual passes holding shares in a trading company worth, for example, £10 m, currently there would no IHT. Following these changes, there would be £1.8 m of inheritance tax
This has the potential to significantly affect owner-managed and family-owned businesses. We strongly recommend immediate advice is sought here. There are mitigation strategies which can help combat these increases. Succession planning needs to be reconsidered now.
Business Asset Disposal Relief (BADR) reductions
BADR is to be reduced significantly from April 2025. This relief provides a lower rate of CGT on certain disposals. At present, it provides a useful relief for business owners disposing of their businesses.
Under existing rules, where a sale is eligible, BADR can reduce CGT to 10%. From April, the rate will increase to 14% and then increase again the following year to 18%. 18% is now the standard rate of CGT which applies, having increased at the last budget.
Business owners looking to dispose of business interests should take prompt advice to maximise these lower CGT rates ahead of the changes.
Business restructuring to reduce costs and increase profits
Business restructuring provides many uses to help meet the changing goals of a firm. This is especially so in the current economic climate, with increased costs and stubborn interest rates. Both of which are affecting businesses’ profitability.
Whilst business restructuring is often utilised during periods of hardship, it is useful at any time in a business’s life to help in reducing their tax burden and increase profits. It is also of great benefit in many specific cases, such as in preparation for a sale or acquisition or in safeguard of assets.
Pre year-end tax planning
At this time of year, ahead of the new tax year on 6 April, pre end of year tax planning is always an important element of both a business’s and their owner’s personal tax strategy. A review here will help ensure all available tax reliefs and allowances have been utilised before the year end. It also provides an opportunity to focus on efficiencies for the year ahead.
With the new tax year starting in April, this should be undertaken now. This provides sufficient time to implement any identified changes in time.
Actions now to navigate 2025
Businesses and their owners can always benefit from a business review, focusing on accounting, tax and business operations.
Tax is complex, fast changing and at times appears to be an irrational area of the law. Circumstances change, both from a personal perspective and a business perspective, so, with it, tax efficiencies can become less effective.
With so many significant changes in 2025, it is essential to understand how these affect your business. Even if this was considered a short time ago, a fresh review, taking into consideration the above points, will benefit.
If you would like to discuss any aspects of the above, please feel free to reach out to me and my wider team at Alexander & Co to discuss how we can assist.