Budget 2025 has been billed as a “fair” budget which targets “those with wealth and assets”. If you’re a contractor, a freelancer or a small company owner, we’ve got to be honest – from your perspective, that mostly means higher tax on dividends, savings and pensions.
Below we’ve summarised the main points of the Budget which affect contractors, freelancers and PSC directors.
1. Dividend tax rises by 2 percentage points from April 2026
The main dividend tax rates all rise by 2 percentage points from 6 April 2026
* Basic rate (usually basic-rate band): rising to 10.75%
* Higher rate (usually higher-rate band): rising to 35.75%
* Additional rate stays at 39.35%
For contractors who draw the bulk of their income as dividends from their limited company, this is a direct and uncomplicated hit to take-home pay. Based on typical levels of profit and extraction, this rise could easily represent an extra £1,700 a year in tax for a “typical” contractor company – on top of previous cuts to dividend allowances and the personal allowance freeze.
There are no changes to the dividend allowance itself announced in this Budget, but planning around when and how you draw your profits from the company becomes more important than ever.
2. Salary sacrifice pensions: NI will apply above £2,000 from April 2029
From 6 April 2029, the government will cap the National Insurance relief available on pension contributions paid via salary sacrifice:
* The first £2,000 per year of pension contributions made via salary sacrifice will still be NI exempt
* Employer and employee NI will be charged in the normal way on any salary sacrifice above £2,000
The Budget documents make clear that this change is designed to rein in a relief that has “disproportionately benefitted higher earners”.
For many small contractor companies, salary sacrifice isn’t used as aggressively as in big corporate pension schemes – but where it is used (for example a director on a low salary sacrificing more into pensions), this change will increase the effective cost of pension funding above £2,000 a year.
On a positive note, pension tax relief itself is unchanged – it’s specifically the NI saving via salary sacrifice that’s being capped.
3. More tax on income from assets: dividends, savings and property
The Budget looks hard at “income from assets” as a way to find money – and that naturally catches a lot of contractors, who typically have company dividends, savings income and sometimes rental property as part of their financial plan.
Key points:
* Dividends
We’ve covered the rate rises above – ordinary and upper dividend rates both increase by 2 percentage points from April 2026.
* Savings income
From 6 April 2027, the savings basic, higher and additional rates are each increased by 2 percentage points, to 22%, 42% and 47% respectively.
If you hold cash or investments outside ISAs and pensions, more of that interest will be taxed at higher rates.
* Property income
From 6 April 2027, separate rates for property income are introduced: 22% (basic), 42% (higher) and 47% (additional).
That will particularly affect contractors who also have buy-to-let portfolios held in their personal name.
HM Treasury’s own description is clear on this point: it is deliberate policy to narrow the gap between tax on work and tax on income from assets. Contractors who have used companies and investments to smooth income are squarely in the Chancellor’s sights.
4. Ordering of allowances – less protection for dividends
From 6 April 2027, the way reliefs and allowances are applied across different types of income will change. Reliefs and allowances that are deductible at steps 2 and 3 of the income tax calculation must first be set against non-savings, non-dividend income before they can shelter property, savings and dividend income.
Plain English translation:
If you’ve historically used your personal allowance and other reliefs to shelter dividend income (for example by taking a small salary and large dividend), the system will be less generous. More of your dividend income will fall into the chargeable bands, especially when combined with frozen thresholds.
5. Threshold freezes extended – more fiscal drag for contractors and the self-employed
The government is not raising the headline rates of income tax or NICs – but it is extending the freeze on key thresholds yet again.
* Income tax thresholds remain at current levels until April 2031
* Employee and self-employed NIC thresholds (Primary Threshold and Lower Profits Limit) are also frozen to April 2031
* The Secondary Threshold for employer NICs is held at its current level from April 2028 to April 2031
This “fiscal drag” means that as your day rate or profits rise with inflation, a bigger slice is quietly pulled into higher tax and NI bands. It hits:
* Limited company contractors – more of your director’s salary and any employment-style income is effectively taxed at higher rates over time
* Unincorporated freelancers – more of your trading profits are pulled into higher bands, even if your real standard of living doesn’t feel like it’s going up much
6. Making Tax Digital and penalties – admin pressure ratchets up
Several changes coming around Making Tax Digital (MTD) and penalties which affect freelancers and landlords in particular:
* New penalty regime for ITSA and VAT from April 2027: the government will apply the “new-style” penalties for late submission and late payment to all Income Tax Self Assessment taxpayers not already in MTD, and will also increase late payment penalties for ITSA and VAT from 1 April 2027.
* MTD start dates adjusted: one very small taxpayer group will be exempt from MTD, and some other groups will see their start date deferred to April 2027 – but overall, the direction of travel is clear: **more frequent digital reporting becomes the norm.
* Corporation Tax late filing penalties doubled from 1 April 2026 – a not-surprising risk area for busy contractor companies that leave accounts and CT600s to the last minute.
Overall, the compliance burden on small businesses isn’t being reduced – if anything, the costs of getting things wrong are rising.
7. Incorporation and structural changes – small but important details
A few more nitty-gritty changes which could affect contractors:
* Incorporation relief no longer automatic
From 6 April 2026, you will have to actively claim incorporation relief when transferring a business to a company – the relief will no longer automatically apply.
This is worth knowing if you’re thinking of moving from sole trader to limited company; it’ll require some extra advice and correct elections to get right.
* Homeworking expenses deduction removed
From 6 April 2026, employees will no longer be able to claim Income Tax relief for non-reimbursed homeworking expenses. Employers can still reimburse employees for eligible costs free of tax and NI. This change mainly affects employees and umbrella workers rather than genuine PSCs (who normally claim costs through the company) – but another example of a small relief being trimmed back.
8. What didn’t change?
As ever in these Budgets, the devil is in what doesn’t change:
* No new IR35 / off-payroll reforms this year
* Corporation Tax main rate stays at 25%, with 19% for those with profits under £50k, with previous full expensing policy broadly carried forward (though the main writing-down allowance rate for main-rate assets will reduce to 14%, alongside a new 40% first-year allowance).
* No big changes to VAT thresholds or the Flat Rate Scheme announced in this document
So while this wasn’t a fresh “IR35 shock”, the longer-term trend is still for higher effective taxation on the typical contractor structure of income and investments.
Our take: another squeeze on the contracting model
After another year, contractors and small company owners are once again on the wrong side of the Chancellor’s view of “fairness”.
* Dividends are taxed more heavily
* Asset income is targeted
* Pension NI relief via salary sacrifice is capped
* Threshold freezes drag more of your income into tax
If you own a limited company or freelance business, this Budget is a clear signal to:
* Revisit how you extract profits (salary vs dividend vs pension)
* Check whether ISAs and pensions can do more of the work for you, given the higher tax on savings and dividends outside wrappers
* Tighten up compliance and filing to avoid the new penalty regime
As always, if you’d like us to model how the changes will affect your own take-home – and what planning options are still available to you – we’d be happy to help.
