2025 Budget Impact on Owner Managed Businesses

Last week’s Budget included several important tax changes for small business owners trading through limited companies.  This update highlights the key points that affect you as a director remunerating yourself through a blend of salary and dividends.

If you’d like help to understand the impact based on your own numbers, book a free consultation. 

The Personal Allowance (£12,570), Basic Rate Band (£50,270) and related NIC thresholds will now remain frozen until April 2031.

What this means for you

• Your optimal director salary thresholds remain unchanged for now.

From the 2026/27 tax year, dividend tax rates will rise:

• Basic rate: 8.75% → 10.75%
• Higher rate: 33.75% → 35.75%
• Additional rate: remains 39.35%
• The £500 dividend allowance stays.

The s455 tax on overdrawn director loan accounts will increase in line with the higher-rate dividend tax.

What this means for you

• Profit extraction via dividends becomes more expensive from April 2026.
• The gap between dividends and salary narrows, especially if your company pays CT at 25%.

If you receive investment or rental income personally, tax on these will increase by 2 percentage points from April 2027.

What this means for you

• Personal investing outside pensions/ISAs becomes less tax-efficient.

From April 2029, the NIC exemption on pension contributions via salary sacrifice will be capped at £2,000 per employee, per year.
Amounts above this will attract employer and employee NICs (pension tax relief remains unchanged).

What this means for you

• If you currently run a significant salary-sacrifice pension scheme, this will become less efficient from 2029/30.

The headline corporation tax rates remain unchanged:

• 19% small profits
• 25% main rate
• Marginal relief continues for profits between £50k–£250k.

Capital allowances changes:

• A new 40% first-year allowance launches 1 January 2026.
• The main pool writing-down allowance drops from 18% to 14% from April 2026.
• Full expensing (100% FYA for qualifying new plant & machinery) remains available.

What this means for you

• For most service-based companies, impact is minimal.

The National Living Wage for ages 21+ will rise to £12.71 per hour in April 2026.
Younger bands rise proportionally, and apprenticeship training for under-25s in SMEs will be fully funded.

What this means for you

• Staff costs will rise, worth reviewing 2026/27 budgets and pricing.

Apprenticeship funding may help reduce some hiring costs.

• VAT registration threshold remains at £90,000.
• Mandatory e-invoicing for VAT-registered businesses is planned for April 2029.

What this means for you

• No short-term VAT threshold squeeze for those trading close to £90k.
• Over time, all VAT-registered companies will need compatible bookkeeping systems which 99.9% of our clients already have in place.

I’m disappointed the budget didn’t focus more on generating growth but not surprised as all the pre-budget leaks pointed to a tax and spend budget.

Overall, in my view, from a tax standpoint it wasn’t good but I’m sure it could have been worse.   The key point impacting many clients will be the increase in dividend tax.  This budget took another step towards removing the tax benefits of operating via a limited company.

The flexibility of timing, in my opinion, still greatly favours those that can use a dividend/salary blend to time extraction.    It’s perhaps rather timely then that in 2026 I will be launching a new tax planning service focusing on building 3 and 5 year profit extraction solutions.   

More on this in the new year.  

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