Budget 2025: what law firms need to know

Key announcements

The chancellor has extended the freeze on national insurance (NI) and income tax bands by another three years, meaning the current thresholds will remain in place until 2031, and resulting in individuals paying more tax and NI as their wages increase with inflation.

There will be a number of income tax increases relating to dividends, savings, and rental income.

The dividend increases come into play from April 2026, increasing the basic rate and higher rates to 10.75% and 35.75% with the additional rate remaining unchanged.

How will the budget impact law firms?

The increase in rental and savings income tax rates may have the largest impact when considering many legal practices. These rates will increase by 2% across all tax bands from 2027.

Currently, interest received (and not paid out) on client accounts is taxed as savings income on partnership/LLP members.

Unless a specific exemption is made for the type of interest income, from April 2027, this income will be taxed at the new rates of 22% for basic rate taxpayers, 42% for higher rate taxpayers, and 47% for additional rate taxpayers.

This is something worth considering, especially given the high rates of interest many legal practices are seeing being credited on their client accounts.

Partnerships and LLPs may also want to consider incorporating their businesses and weighing up the pros and cons of changing their business structure.

For those already operating through a limited company, the new dividend rates may change your remuneration strategy; however, care is always required when making changes to the way directors/shareholders draw a return from a company.

HMRC has access to great amounts of information, but the temptation to swap salary for dividend, or vice versa, without commercial justification must be resisted.

Employee ownership trusts

One structure that may not be as enticing following the budget is that of an employee ownership trust (EOT).

These have grown in popularity over recent years as part of business succession planning, effectively allowing the exiting parties, if eligible, to receive 100% relief and pay no capital gains tax.

However, this relief has been restricted, with immediate effect (from 26 November 2025) to 50% – potentially impacting transactions that have not yet been completed.

Inheritance tax and APR/BPR Relief

When it comes to inheritance tax (IHT) relief, the £1 million agricultural property relief/business property relief allowance remains, but this can now be transferred between spouses and civil partners, meaning unused relief will not be lost on the first death.

Pressure to increase wages

Changes to salary sacrifice contributions

Further impacts from 2029 will restrict salary sacrifice contributions to an annual amount of £2,000 per employee.

With any additional amounts over the £2,000 suffering tax and national insurance contributions as normal salary would.

These changes land at a time when many firms are looking to grow their teams, and it will be interesting to see if the extra costs will have a direct impact on recruitment.

Removal of the working from home allowance

The working from home allowance is being removed from April 2026. This is used by many in the legal sector and will impact both employees and employers.

In summary

Overall, it was a mixed budget, with relief that many of the rumours did not materialise, but the impact on what many may initially see as small changes will still be felt by businesses and individuals alike in the years to come.

If you would like further clarity or support regarding the impact of the 2025 autumn budget on your law firm, please get in touch on 0808 144 5575 or email help@armstrongwatson.co.uk.