Why stealth taxes and fiscal drag are the Budget’s hidden levers
This is the first of a series of articles analysing details of the recent Autumn Budget statement and the impact these measures will have on businesses and individuals alike.
Make no mistake. Despite what the government may say, the 2025 Budget contained a series of measures that increase the tax burden, even if headline rates did not rise. Frozen thresholds, higher inflation and more targeted increases combine to pull more people into higher liabilities. For business owners, these quiet yet impactful rises add up quickly and may change how you plan for the future. In this article, we’ll tell you why.
Income tax freezes and fiscal drag
One of the most significant decisions in this Budget is the extension of the income tax freeze. The personal allowance will remain at £12,570 until April 2031, while the basic, higher and additional rate bands will stay fixed until the same date. The interesting thing is that these freezes now stretch far beyond the current Parliament, laying down a challenge to any future governments.
The OBR highlighted the dramatic extent to which this freeze impacts fiscal drag. Inflation is predicted to reach 3.5% this year and 2.5% next year, both higher than earlier forecasts. When inflation is high and wages rise to match it, the amount of tax the government collects when thresholds remain static rises sharply, as more people find themselves in higher tax brackets.
The freeze is estimated to raise an extra £8 billion for the Treasury. The total tax increase from this Budget is £26 billion, taking the tax burden to 38% of GDP, a peacetime record.
Dividend tax rises for business owners
From the 2026-27 tax year, dividend taxes for business owners will increase. The basic rate becomes 10.75% and the higher rate will be 35.75% (both rises of 2 percentage points), while the additional rate remains the same at 39.35%. These changes shift the balance between salary and dividends, and could make moving from sole trader to limited company status less attractive for many business owners.
Other considerations include:
- Higher tax liabilities due to frozen thresholds
- Increased costs of drawing dividends
- Reduced take-home pay for owners’ households
- Timing of remuneration choices
Of course, there are still reasons outside of pure finance why incorporating can still be a good idea, but it’s no longer an automatic choice. Business owners and their accountants must take everything into account.
Impact on borrowing and business confidence
The economic context intensifies the effect of stealth taxes. Borrowing costs remain the highest in the G7, even though the UK does not have the highest debt-to-GDP ratio. The traditional indicators of confidence in the economy have also weakened, with business surveys like the PMI Index reporting pessimism, and high street activity more subdued than usual.
The OBR also downgraded growth forecasts to around 1.5%, with productivity remaining one of the biggest structural challenges. Private sector productivity has largely recovered since the pandemic, but the public sector remains far behind.
Government bond yields now sit above the levels seen after the infamous Truss-Kwarteng mini-Budget, which raises questions about how markets will react to the Chancellor’s plan to bring in steep tax rises towards the end of the parliamentary term. One OBR chart showed significant revenue increases expected at that point, while spending remained static. Will the markets find these delayed rises credible? We’ll have to wait and see.
It’s undoubtedly a challenging time for business owners who may be looking to scale their business, expand into new lines or take on more staff. Owners will be weighing investment plans more carefully, mindful of tighter margins and slower returns. There will also be caution from customers and suppliers to add an extra layer of uncertainty. In this tentative business environment, success depends on sound strategy and financial discipline.
Looking to the future
The Chancellor has pulled the hidden levers of stealth taxes and fiscal drag in this Budget. Frozen income tax thresholds, rising dividend taxes and higher inflation combine to raise the tax burden to levels not seen in living memory. They may operate quietly in the background, but it will become more noticeable as wages increase. The gloomy picture of the broader economy will not help business owners who want to adapt and succeed.
For business owners, the message is clear. Decisions around tax planning, dividend strategy and investment need to start as early as possible. The structure of the system has changed, and you’ll feel the impact more and more every year.
Accentuate by K3 Hub – The Autumn Budget: a comprehensive analysis
On Monday 1st December 2025, we held an Autumn Budget webinar at which our keynote speaker, Jeremy Mindell, Director at Primondell Ltd, analysed the details of the statement and provided a comprehensive overview of the latest economic and public financial outlook.
Jeremy was joined by a panel of experts discussing the economy, the deals market, stealth taxes and other measures affecting businesses and private individuals.
The panel included:
Kelly Mitchell
Managing Director, Restructuring & Insolvency
Quantuma
Ian Barton
Managing Director, Corporate Finance
Quantuma
Marcus Pilkington
Chartered Financial Planner
Pareto
Holly Bedford
Managing Director, Tax Advisory
K3 Tax Advisory Limited