The UK Chancellor, Rachel Reeves, delivered a tax-raising budget on November 26 with significant implications for businesses up and down the country.
The run-up to the 2025 UK Budget was marked by an unusual level of speculation and worry over the state of the public finances. The government’s official economic forecaster downgraded its growth and productivity assessments1 – creating a potential multi-billion shortfall in the government’s finances.
In response, Reeves unveiled a freeze on income tax thresholds, restrictions on pension salary-sacrifice arrangements, a new surcharge on properties worth over £2 million, and a raft of other measures intended to raise nearly £30 billion of additional tax revenue over the years to 2029 – allowing her to continue to claim she will move the government budget into surplus by then.
These measures are set to impact on UK businesses in a variety of different ways. Below is Gallagher’s analysis of the likely implications of Budget 2025:
Income tax and national insurance
As widely predicted in the run-up to Budget Day, the Chancellor has frozen in place the income thresholds at which UK employees pay personal income tax – 20% on income between £12,750 and £50,270 a year; 40% on income between £50,271 - £125,140, and 45% thereafter. These limits – already set to last until 2027/28 – will be held in place for an additional three years, until 2030/31. It is estimated that the failure to increase these brackets in line with inflation will raise around £8 billion a year for the government.
This continuing ‘fiscal drag’ may have indirect impacts on businesses, for example by continuing to suppress consumer spending – but the direct implications for business owners will be limited.
There were no changes to the headline rates of national insurance – an employment tax paid by both workers and companies. The rate that employers pay was substantially increased at last year’s Budget, from 13.8% to 15%; while employees pay 8%.
New business rates for high street and leisure sectors
The Chancellor announced significant cuts to business rates – local property taxes – for small enterprises in the retail, hospitality and leisure (RHL) sector. This will affect around 750,000 properties, Reeves said.
The measure forms part of longstanding plans to shore up high street businesses. The changes mean that from April 2026 onwards, RHL businesses will pay a lower rate of 38.2p in the pound on properties with a rental value of less than £51,000 a year (compared to 43.2p for other sectors). For properties worth £51,000 to £499,999, the RHL rate will be 43p in the pound, compared to 48p for others.
To fund this measure, the UK government is increasing the rate paid on the very largest business properties – such as the distribution warehouses used by large online retailers. From April, this rate will be 50.8p – 2.8p higher than the standard rate of 48p.
These changes come on top of generally lower business rates on all premises from next April, which are due to changes in property values. The standard small-business rate will fall from 49.9p in the pound to 43.2p, while the rate on properties worth more than £500,000 will drop from 55.5p to 48p.
Dominic Roe, Managing Director of UK Retail & Hospitality at Gallagher, said: “Businesses operating in the retail, hospitality and leisure sectors continue to be hit by rising supply chain, energy and premises costs, so this reduction in business rates will be a much-needed lifeline for smaller businesses. The hospitality and leisure sectors employ around 3.5 million people across the UK, making these jointly the third largest UK employer, so their success is core to the UK’s wider economic stability.
“While we believe this is a positive move by the government, the suggestion that the tax burden should be passed onto larger businesses will have far-reaching consequences in sectors which are already squeezed on margin. Undoubtedly it will result in further store closures, job losses and price rises for consumers. The impact on the high street could also be significant – flagship stores bring footfall and if we continue to penalise them, we risk destabilising nearby small businesses.
“These sectors are crying out for tax breaks such as a cut in VAT which would drive investment and kickstart economic growth.”
Mark Eade, Head of Practice for UK Hospitality at Gallagher, said: “The hospitality sector is the highest-taxed in the economy, so it was no surprise that the sector’s trade body UKHospitality had three asks for today’s Budget, and they were all tax-related. They were to lower business rates to revive high streets, fix National Insurance Contributions to boost jobs, and to cut VAT on hospitality to drive investment.
“We got some action on business rates for smaller firms, which is welcome, but the UK’s hospitality sector is still overtaxed. Hospitality firms in the UK pay the full rate of VAT at 20%, for example, while the EU average is 10-13%. Clearly, the government can and should do more to support this vital part of our economy.”
"Whilst it is still to be seen what impact the overnight visitor levy will have, this could negatively impact local economies where accommodation businesses can be forced to pass on an additional tax to consumers, increasing the cost of overnight stays."
Council tax reforms
Reeves also announced a new council tax surcharge on high-value properties: £2,500 a year for houses worth more than £2m, rising to £7,500 for properties worth £5m. This will raise £400m by 2031.
Minimum wage rises
There will be above-inflation increases in the UK’s national minimum wage (4.1%) and the special rate for 18-20 year olds (8.5%), taking these to £12.71 an hour and £10.85 an hour respectively. This puts more money in workers’ pockets, but also increases bills for businesses.
The UK’s trade body for the hospitality and catering industry, UKHospitality, has warned that the rise in the youth rate will be a particular challenge for employers in the sector.2. Kate Nicholls, chair of the group, said: “When there are almost a million young people not in employment, education or training, this will put further pressure on already fragile youth employment rates.”
Dominic added: “Minimum wage increases will have a disproportionate impact on the hospitality and retail sectors which are still reeling from the national insurance hike last year and employers will need to factor this change in when planning staffing levels. At a time when many businesses are already feeling the squeeze this will pile more pressure on profit margins and could impact entry level job opportunities, with job losses to follow.”
Pensions changes and salary sacrifice rules
In an additional revenue-raising measure, the government announced plans to restrict the tax relief that employees can get on their pension savings through salary-sacrifice arrangements.
From April 2029, salary-sacrifice pension contributions above an annual £2,000 threshold will no longer be exempt from tax. The government estimates this will raise £4.7 billion in 2029/30 and £2.6 billion in 2030/31. According to previous research carried out by officials, many employers have expressed concern that this will disincentivise pension saving among their employees, as well as adding admin burdens and complexity.
David Piltz, CEO of Gallagher Benefit Services, said: "The Chancellor’s decision to leave the annual allowance and tax-free lump sum unchanged is welcome, however the annual threshold on saving for retirement through salary sacrifice is disappointing. This is not just a change that will affect the wealthy – £2,000 is approximately 5% of average UK earnings so this will make retirement savings more expensive for millions of workers, at a time when it is estimated that 40% of UK adults are not saving enough for a comfortable retirement.
“For employers, this will add significant cost, about a quarter of Gallagher clients reinvest salary sacrifice savings directly into their employees’ pensions, so the cap will inevitably result in lower levels of retirement saving. Whilst the deferred introduction until 2029 is welcome, this initiative will introduce another layer of complication to an already complex pension landscape.”
Extension of fuel duty freeze, and a new electric vehicles tax
One of the highest-profile measures trailed before the Budget was the creation of a new mileage-based charge payable by the drivers of electric and hybrid vehicles (EVs). This could have a significant impact on businesses that operate fleets of such vehicles, or those that lease them.
The new electric vehicle excise duty will be charged at 3p per mile, or 1.5p for plug-in hybrids. The government estimates it will raise around £1.4 billion a year, according to Budget documents. Owing to the much larger numbers of petrol vehicles on the road, fuel duty currently raises just under £25 billion a year for the Exchequer.
Reeves further announced that the petrol fuel duty will again be frozen (i.e. not uprated in line with inflation) from April next year – as it has been every year since 2011. In addition, the temporary 5p cut to this tax that was introduced in 20223 will be extended until August 2026.
Adrian Scott, Director of Transportation, Gallagher, said: Pre-budget there was concern amongst haulage, bus and coach operators over the proposed pay-per-mile tax and there is relief from operators that the new tax proposed for 2028 will only apply to cars. However, for those firms operating car fleets these additional charges on electric vehicles risk placing even greater pressure on them at a time they are already facing rising operating costs. Many fleet operators made significant investments in EVs on the understanding that long-term tax incentives would support the transition. Changing the rules now not only creates financial strain, but could also slow the shift towards cleaner transport. While EVs offer important benefits - lower emissions and reduced running costs - operators are still managing higher upfront prices, depreciation challenges and potentially greater repair costs. Additional taxation at this point could make fleet decarbonisation harder, not easier.”
Other corporate and business tax changes
There were a raft of smaller changes to various corporate and business taxes as well, including tax changes to incentivise entrepreneurship, and a three-year exemption from Stamp Duty Reserve Tax for companies listing in the UK.
Other measures increased taxation on businesses – such as cutting the relief on capital gains tax on businesses sold to employee ownership trusts, from the current 100% to 50%, which will take effect immediately.
Reeves also announced a series of new taxes on gambling, particularly online. The UK’s remote gaming duty will increase from 21% to 40%; and this and other changes will raise over £1 billion a year by 2031, the Chancellor said.
In the wake of the Budget, UK businesses will watch market and political reaction closely. Inflation, running at 3.8% for the 12 months ended October,4 remains a key economic concern – as does the cost-of-living crisis, according to Gallagher’s recent 2025 UK Business Risk Index.
In uncertain times, UK businesses are investing in resilience, and engaging with their insurers to ensure their coverage matches their current risks. For more information on how we can help, contact your Gallagher representative, or connect with a specialist.