Autumn Budget 2025 – dividend tax hike, salary sacrifice, income tax freeze

The Chancellor has completed her Autumn Budget statement, formally confirming the major tax measures leaked earlier in the day – most notably another increase to dividend tax and salary sacrifice changes.

Key measures for contractors

Dividend tax hike (limited companies)

Of most interest to limited company contractors, dividend tax is due to increase by 2p from April 2026.

The basic and higher dividend rates will rise to 10.75% and 35.75% respectively. The additional rate and the £500 dividend allowance remain unchanged.

This is another blow for limited company owners, already facing higher Corporation Tax rates since 2023, and successive dividend hikes since 2016.

Salary sacrifice changes (umbrella contractors)

Umbrella contractors who use salary sacrifice to boost pension contributions will also be hit. From 2029, only the first £2,000 of sacrificed pay will be untaxed.

Anything above this threshold will trigger both employers’ and employees’ NIC, which ultimately comes out of the contractor’s assignment rate. Fortunately, this measure will not take effect until 2029.

Although there is still Income Tax relief on pension contributions made via salary sacrifice, the NIC savings that made umbrella salary sacrifice an attractive option largely disappear once you pass the £2,000 threshold.

Main Autumn Budget 2025 changes

You can read the full Budget document here.

Personal tax and dividends

• Dividend tax rises by 2p from April 2026 – basic and higher rates increase to 10.75% and 35.75%. Read more.
• Income tax and National Insurance thresholds frozen until 2031, gradually pulling more people into higher tax bands. In fact, this measure will raise the same funds for HMT as the abandoned ‘2p’ income tax rise!
• Investment income rates increase – dividend, savings and property income rates all rise by two percentage points.
• Separate property income tax bands (22%, 42%, 47%) apply from 2027–28.
• Cash ISA cap set at £12,000 a year from 2027 (within the existing £20,000 allowance).

Compliance, Loan Charge and avoidance rules

• New enforcement measures targeting the promoters of tax avoidance schemes, including contractor loan arrangements. HMRC gains wider powers to investigate, block and penalise promoters.
• Increased action on historic disguised remuneration and Loan Charge cases, with a commitment to recover unpaid tax more aggressively where schemes are still being unwound.
• 350 additional HMRC investigators allocated to SME fraud, evasion and avoidance activity.
• Tougher Construction Industry Scheme (CIS) rules to stop abuse of gross payment status.

Business taxes and expenses

• Capital allowances reform – a new 40% First Year Allowance for main rate assets from 2026; main writing-down allowance reduced from 18% to 14%.
• Corporation Tax unchanged, but the overall tax burden on company directors rises due to the dividend tax hike and frozen income tax thresholds.
• Working from home expenses tightened – the tax deduction for unreimbursed WFH costs is removed from 2026.

Employment, wages and pensions

• National Living Wage rises to £12.71 in April 2026, with steep increases also applied for younger workers.
• Salary sacrifice pension NIC change – employee and employer NICs will apply to contributions above £2,000 a year from 2029. See explanation above.
• State Pension rises by 4.8% in April under the Triple Lock.

VAT, MTD and digital reporting

• Making Tax Digital expanded – new compliance powers from 2026 and **mandatory e-invoicing for all VAT invoices from April 2029**.
• More frequent PAYE/VAT payment consultations for small businesses.
• Crypto reporting rules tightened – UK platforms must report UK taxpayers’ activity from 2026.

Transport, motoring and business costs

• 5p fuel duty cut extended to August 2026, then staged rises resume.
• Mileage-based tax for electric vehicles introduced from 2028.
• Rail fares in England frozen for one year.

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