How Does The 2025 Budget Affect Me?

The government’s 2025 Autumn Budget includes several changes that directly affect small businesses, sole traders and partnerships. If you take income as salary, dividends or from property, these updates are particularly relevant to you.

Higher tax on dividends, savings and property income

From April 2026, dividend income will be taxed at higher rates. From April 2027, the same applies to property income and savings income.

If you take dividends from your own company or receive rental income, your future tax bills will increase. It is now more important to plan how and when you take income from your business or investments, rather than simply taking it as you need it.

📈 Dividends

From 6 April 2026: dividend income tax rates increase by 2 percentage points. The basic rate on dividends becomes 10.75%, and the higher rate becomes 35.75% (the “additional” dividend rate remains unchanged).

Owner-managed companies have often operated under the premise that “dividends are more tax-efficient than salary”. After the 2025 Budget in particular, that is only partly true:

• Dividends are still efficient at basic-rate levels

• Once you go into the higher-rate band, the gap narrows a lot

• In some cases, taking more dividends can cost you more overall than taking more salary, once you combine corporation tax and your personal tax.

So if you usually take large dividends, you may need to rethink your income planning from April 2026 onward. A simple way to think about it is if you are a higher-rate taxpayer:

• Every £1 your company earns and you take as a dividend ends up losing just over half in taxes once you add together corporation tax and dividend tax.

• The tax you pay on extra salary at higher rates is now very similar to the tax on extra dividends. So the old advice of “always take dividends” no longer applies at the higher end.

This doesn’t affect everyone. It mainly affects you if:

✔ You take most of your income from dividends
✔ You are in the higher-rate tax band
✔ You take out most of the profit your business makes

Salary

👎 Less efficient at basic rate
👍 Almost similar or cheaper than dividends at higher rate (after new rules)
📌 Larger withdrawals may favour salary from 2026+

Dividends

👍 Still tax-efficient at basic rate
⚠️ Can cost more than salary at higher rate
📌 Best when spreading across family shareholders

N.B.

If you have a spouse or family member who does not use their full tax allowance, sharing dividends between you can still be very efficient, as long as they genuinely own the shares. This helps keep more income in the basic rate tax band and reduces the higher-rate impact.

🏠 Landlords

From April 2027, tax on property income (rental profits) will increase under the 2025 Budget.

New property-income tax rates from 2027:

• Basic rate: 22%

• Higher rate: 42%

• Additional rate: 47%

That means if you rent out a property and make profits, those profits will now be taxed at those higher rates depending on your overall income levels. As such, it would be prudent to review the net yield on properties. Do not assume rental income will remain as profitable as in previous years.

💸 Savings

From April 2027, tax on savings income (such as bank interest and interest from some investments) will increase in the same way as rental income. The new rates will be:

• 22% for basic rate taxpayers

• 42% for higher-rate taxpayers

• 47% for additional rate taxpayers

However, unlike property income, most people will not notice a big change because of the Personal Savings Allowance (PSA).

What is the Personal Savings Allowance?

The PSA gives you a tax-free amount of savings interest each year, depending on your tax band:

• Basic rate taxpayers: £1,000 of interest tax-free

• Higher rate taxpayers: £500 tax-free

• Additional rate taxpayers: No allowance

Many individuals receive less interest than these tax-free allowances. That means the rate increase will not affect a large number of people.

Income tax thresholds frozen until 2031

The personal allowance (£12,570), the higher-rate threshold (£50,270) and other income-tax thresholds will remain frozen until April 2031.

That means if your income rises even modestly over time, you could end up paying more tax. Even though the tax rates themselves do not change. This effect is sometimes called “fiscal drag,” and critics have described it as a form of “stealth tax.”

Pensions — salary-sacrifice capped at £2,000

From April 2029, pension salary sacrifice will still be allowed, but the National Insurance savings will be capped. Only the first £2,000 per year of salary that you sacrifice into your pension will avoid NI. Anything you sacrifice above £2,000 per year will no longer save NI and will be treated like normal salary for NI purposes.

It’s important to note that this cap applies only to the salary you personally sacrifice, not to the employer’s pension contribution. So if you sacrifice £2,000 and the employer (or your own company) contributes £2,000 on top, the NI limit only applies to your £2,000 sacrifice, not the £4,000 total pension contribution.

Employee and employer NI will apply above £2,000

Once you sacrifice more than £2,000 of salary in a tax year:

• Employee NI will apply to the excess (which is 2% if you are a higher-rate earner)

• Employer NI will also apply (at 15%) on the excess

So large pension sacrifices become more expensive for both the employee and the employer.

Income tax relief still applies

This change affects NI only. You will still get the usual pension income tax relief on all contributions, even above £2,000. Pension saving is still tax-efficient; it just will not carry the same NI benefit if you sacrifice more than £2,000 of salary.

Electric cars: mileage-based road tax from 2028

The Budget marks the end of “tax-free road use” for electric cars. From April 2028, electric vehicles (EVs) and plug-in hybrids will be subject to a new mileage-based road tax, replacing the current exemption from fuel duty.

While the rates have not been finalised yet, the government intends to charge roughly:

• 3p per mile for fully electric cars

• 1.5p per mile for plug-in hybrids

A simple way to think about it

Electric cars will no longer be cost-free to run on the road. Instead of paying duty on fuel, you will pay a charge based on how far you drive.

If you do low mileage (short commutes, local work), this may still be cheaper than petrol/diesel.
If you drive long distances, own multiple vehicles or use an EV through your company, you may see costs increase.

More expensive EVs receive a small boost

From April 2025, all electric cars will start paying standard road tax (about £190 a year), and expensive EVs will also pay an additional “expensive car supplement” of around £390 a year for five years if their list price exceeds the threshold. The Budget increased this threshold from £40,000 to £50,000 for EVs, meaning fewer electric cars will be classed as “expensive” and therefore fewer will pay the extra £390 charge.

Other notable changes from the 2025 Budget

• New high-value property surcharge (“mansion tax”)
  A council-tax-style surcharge will apply annually to residential properties worth over £2 million.

• Cash ISA annual deposit limit reduced
  from April 2027, for savers under 65, the maximum you can put into a cash ISA each year will fall from £20,000 to £12,000.

• Statutory minimum wage / living wage increase
  From April 2026, the National Living Wage (age 21+) increases to £12.71 per hour, and the minimum wage for 18–20-year-olds rises to £10.85 per hour. Businesses employing staff close to minimum wage should review payroll budgets.

• Business rates relief for retail, hospitality and leisure
  Relief continues for eligible businesses in these sectors, helping to reduce commercial rates for high-street and customer-facing businesses.

• Investment and business reliefs expanded
  The Budget provides incentives for companies investing in growth and innovation, with improved upfront allowances and support for entrepreneurial investment schemes.

• Apprenticeships support for SMEs
  Small and medium-sized businesses will see greater government backing for apprenticeships, including support to make placements more accessible for smaller employers.

• Two-child cap removed for certain means-tested benefits
  The limit restricting welfare support to two children has been abolished for means-tested benefits. (This does not change Child Benefit entitlement rules.)