UK private M&A trends: insights from 2025 and predictions for 2026

Deal Flow in 2025

During the first half of 2025, UK private M&A activity slowed significantly compared to the strong finish in 2024. The graph below shows the total deal volume and value across the M&A landscape in the UK from Q1 2021 to Q3 2025. Deal volume fell to c. 3,400 transactions in the first half of 2025, marking approximately a 15% decline from the c. 4,000 deals completed in the second half of 2024.

Source: https://www.experian.co.uk/content/dam/marketing/uki/uk/en/pdf/Market-IQ-Report-YTD-2025.pdf

1. The cost of debt finance was one of the reasons for slower deal flow early this year as inflation remained persistent in early 2025, pressuring profit margins and causing buyers to scrutinise targets’ cash flows closely. In its Monetary Policy Report of August 2025, the Bank of England reported that inflation would temporarily increase to a peak of 4% by September 2025. However, the reduction of the base rate to 4% in August 2025 signalled the Bank of England’s confidence that the rate of inflation would begin to fall after this peak. The Bank of England recently stated that the rate of inflation should fall to 3% by early 2026, although the Autumn Budget 2025 has dampened these estimates given the little financial respite provided to businesses.[1] Nevertheless, we anticipate that with further reductions in the Bank of England’s base rate due to gradually falling inflation, borrowing conditions should improve and lead to a resurgence of M&A transactions in 2026 which were previously shelved due to high financing costs.
2. Perhaps the most significant factor for a lower deal volume in 2025 has been the Employers’ National Insurance Contributions (NICs) and Capital Gains Tax (CGT) increases in the Autumn Budget 2024 which caused significant impact on the M&A market in Q1 2025. The surge in deals in the second half of 2024 was widely attributed to the expectation that these tax rises would be announced in last year’s Budget causing many transactions to complete before the tax increases went live on 6 April 2025. As the new taxes came into force, there was a marked dip in the volume of deals as sellers waited for valuations to improve, and buyers became more risk averse in uncertain market conditions.
   One of the key themes shaping M&A activity in the first half of 2025 was the valuation gap, partly influenced by the tax increases mentioned above. Heightened tax burdens and increased market uncertainty led to more conservative valuations, particularly for companies lacking robust fundamentals. However, as shown in the graph above, deal value surged in Q3 2025, indicating that despite fewer transactions, buyers remain eager to acquire top-tier companies with resilient cash flows and strong performance metrics. In particular, the Small and Medium-Sized Enterprise (SME) space held steady in the first half of 2025 with sub-£100 million deals comprising 88% of M&A transactions.[2] Such companies still attracted competitive bidding and high EBITDA multiples, often from both strategic acquirers and private equity funds.[3] Accordingly, dealmakers in high-growth sectors such as technology, media, & telecoms (TMT) as well as in institutionally key UK sectors such as professional services have been able to drive M&A deal flow in the latter half of this year.[4] The uncertainty prior to the Autumn Budget 2025 and valuation gaps have also caused deal structures to adapt, leading to earn-outs, deferred payments and Warranties & Indemnities (W&I) insurance protections becoming more common this year.^[5] Auction sales have gained popularity as sellers seek the best possible valuation for their businesses while increased risk aversion among buyers has translated into a 17% decline in venture capital deal volume in Q3 2025, underscoring a preference for stability over speculative growth.[6]
3. Private equity-backed deals have distinguished themselves in 2025, underpinning much of the UK’s M&A momentum.[7] As of October 2024, private equity (PE) funds held approximately £178 billion in “dry-powder” (capital committed by investors but not yet deployed) [8] which they have used to fund their portfolio companies’ acquisitions in 2025. We anticipate that this will drive deals in 2026 and beyond as funding rounds have risen by 12% in Q3 2025[9] alone, leading to additional capital stored up in funds.[10] As was the case earlier in the year, SME businesses with predictable revenues remain highly sought after, with PE funds driving the demand for such companies as they seek to add growth and stability to their portfolios amid rising operating costs.[11] This is evidenced by the fact that 78% of IT services deals completed in Q3 2025 have been PE-backed (either directly or via an existing portfolio company). Limited Partners, the main investors in PE funds, are also increasingly prioritising liquidity over long-term returns, a trend that could drive portfolio company sales in 2026.

Overview of the Autumn Budget 2025 and Impact on M&A Deals in 2026

The Budget delivered by the Chancellor on 26 November 2025 introduced several tax and policy measures which may impact M&A activity in 2026. From a dealmaking perspective, the Budget proved less disruptive than initially anticipated – further increases to CGT did not materialise and the Chancellor outlined some sector-specific investments to encourage growth, however rising costs and persistent high rates of business tax will continue to have an impact in 2026.

1. Labour-intensive businesses will need to contend with the increase in minimum wage and payroll taxes. As widely expected, the Chancellor confirmed a freeze on income tax thresholds until April 2031. This measure will gradually push more individuals into higher tax bands, increasing their personal tax burden. While businesses are not directly affected by income tax thresholds, rising wages to offset inflation are likely to lead to higher employer NIC costs. High NIC costs erode profit margins which could lower valuations for companies in the hospitality, manufacturing and construction sectors where margins are already low.
   SMEs are likely to shoulder the greatest impact of rising employment costs as household incomes are squeezed, dampening demand for certain goods and services. However, this environment may create opportunities for larger competitors or trade buyers to pursue acquisitions aimed at consolidating operations and achieving cost efficiencies—such as streamlining headcount and reducing wage and NIC expense relative to revenue.[12]
2. The increased rates of Business Asset Disposal Relief (BADR) will rise again from 14% to 18% in April 2026. This further increase in BADR could trigger another wave of sales before the deadline as business owners or partners seek to complete disposals before the higher rate applies. BADR currently offers a reduced CGT rate on the first £1 million of lifetime gains, making it highly attractive for entrepreneurs and shareholders in trading companies. Private equity funds may also target owner-led start-ups in high-growth sectors such as AI and biotech, which may create further deal momentum.
3. CGT relief for Employee Ownership Trusts (EOTs) has been slashed. From 26 November 2025, selling shares to an EOT (a popular succession-planning route) is no longer eligible for 100% CGT relief; instead only 50% of the gain will be tax-free and the other 50% immediately taxable. This reduces the tax advantage of EOT sales dramatically, altering owners’ exit strategies. Some founders who were considering EOTs for a tax-free exit will re-evaluate – with only half the gain eligible to be sheltered – third-party sales or management buyouts may become more appealing.[13]
4. The Budget also introduced a new 40% first-year capital allowance for qualifying plant and machinery from January 2026. A reduction in the writing-down allowance from 18% to 14% was also introduced. While full expensing remains available for many new investments, this new relief is particularly relevant for businesses acquiring assets for leasing or operating in capital-intensive sectors. For M&A, this could enhance post-deal cash flows and support higher valuations where significant capital investment is planned, especially in the manufacturing, energy and infrastructure sectors. However, the cut in the annual allowance to 14% means plant-heavy companies will have a slower tax depreciation from 2026 onwards, increasing their taxable profits down the line. Buyers will undoubtedly factor in these higher future tax bills into their valuations, which could make efficient tax structuring vital in M&A deals.

The resolution of uncertainty following the Budget, which had been a key factor in deal stagnation, could itself act as a catalyst for renewed transaction activity. Going into Q3 2025, many dealmakers were in “wait-and-see” mode as a result of possible tax rises. The clarity provided post-Budget will mean dealmakers can now plan and structure transactions with more confidence.

Looking ahead to 2026, we anticipate a steady flow of deals rather than a surge, as further tax rises have been avoided. Activity is likely to concentrate on sectors benefiting from government investment incentives —such as technology and life sciences—alongside resilient businesses with strong cash flows. A backlog of deferred exits from 2025, combined with mounting pressure on private equity funds to deliver returns, should drive portfolio disposals. After a challenging second half of 2025, clearer market conditions suggest that remaining on the sidelines could mean missing opportunities.

1. [1] https://www.bankofengland.co.uk/monetary-policy-report/2025/november-2025[2] https://www.lubbockfine.co.uk/blog/market-review-how-is-ma-performing-in-the-uk-in-2025/
2. [3] https://www.frazerhall.com/news/a-resilient-uk-ma-market-for-smes-in-2025/
3. [4] https://www.experian.co.uk/content/dam/marketing/uki/uk/en/pdf/Market-IQ-Report-YTD-2025.pdf and EMEA report
4. [5] https://www.trowers.com/insights/2025/february/monitoring-midmarket-ma-in-the-uk-2025
5. [6] https://www.experian.co.uk/content/dam/marketing/uki/uk/en/pdf/Market-IQ-Report-YTD-2025.pdf
6. [7] https://www.experian.co.uk/content/dam/marketing/uki/uk/en/pdf/Market-IQ-Report-YTD-2025.pdf
7. [8] https://www.grantthornton.co.uk/insights/global-optimism-uk-caution-private-equity-outlook-2025/
8. [9] https://www.spglobal.com/market-intelligence/en/news-insights/articles/2025/11/uk-private-equity-deal-activity-on-track-for-steep-annual-decline-94707448
9. [10] https://www.consultancy.uk/news/40265/rsm-deal-activity-by-private-equity-funds-cooled-down-in-first-quarter
10. [11] https://www.frazerhall.com/news/a-resilient-uk-ma-market-for-smes-in-2025/
11. [12] https://www.relocatemagazine.com/uk-autumn-budget-1125-expert-legal-comments
12. [13] https://www.boyesturner.com/news-and-insights/autumn-budget-2025-key-private-client-updates

This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.

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