What Budget 2025 really means for owners of small limited companies

When Priya set up her small marketing agency, everyone told her the same thing:

“Pay yourself a small salary and the rest as dividends – that’s the tax‑efficient way.” 

For years, that rule of thumb broadly worked.

She took a salary just high enough to protect her State Pension record, and topped up her income with dividends from her company.

Then came Budget 2025.

Over coffee, her accountant said:

“From April 2026, taking dividends out of your own company is going to get more expensive. We need to rethink your mix of salary, dividends and pension contributions.” 

This article is for people like Priya – owners of small UK limited companies who want to understand, in plain English, what has changed and what (if anything) they should do before the new rules bite.

1. The big change: dividend tax is going up

The government has been very clear about its direction of travel:

• It wants to make the tax system “fairer” by asking income from assets – such as property, savings and dividends – to contribute more, because it doesn’t suffer National Insurance the way salaries do.

To that end, Budget 2025 does three important things for small company owners:

1. Increases dividend tax rates by 2 percentage points at basic and higher rate from 6 April 2026.  
2. Leaves the small £500 dividend allowance in place – so there is still only a very small slice of dividends that is tax‑free. 
3. Freezes the main income tax thresholds until at least April 2031, so more of your income is gradually dragged into higher rates over time.

The headline change for dividends is simple:

From the 2026–27 tax year onwards,
– Basic‑rate dividend tax goes from 8.75% → 10.75%
– Higher‑rate dividend tax goes from 33.75% → 35.75%
– Additional rate stays at 39.35%

So if you’re the classic owner‑manager taking most of your income as dividends, your personal tax bill is going up – even if your company’s profits don’t change at all.

2. A real‑world example: how much more will you pay?

Let’s stick with Priya.

• She draws a salary of £12,570 from her company (enough to keep her National Insurance record).
• On top of that, she takes £40,000 of dividends each year.
• Assume she’s in England and has no other income.

Now (2025–26)

• Personal Allowance: £12,570 (used up by salary)
• Dividend allowance: £500 (0% tax)
• Remaining taxable dividends: £39,500

Income bands:

• Basic‑rate band goes up to £50,270.
• After using £12,570 for salary, there is £37,700 of basic‑rate band left for dividends.

So:

• £37,700 of dividends at 8.75%
• £1,800 of dividends at 33.75%

Result:

• Dividend tax ≈ £3,906

From April 2026 (2026–27)

Same numbers, but with higher dividend tax rates:

• £37,700 at 10.75%
• £1,800 at 35.75%

Result:

• Dividend tax ≈ £4,696

That is about £790 extra tax each year for doing nothing different – purely because the rates went up.

And remember: the bands are frozen, so over time more of what you take out may creep into higher rate if your drawings increase with inflation. (GOV.UK)

3. Does this mean salary is now better than dividends?

Not necessarily.

A few key points, in everyday language:

• Dividends still don’t attract employee or employer National Insurance. Salary does.
• The company pays Corporation Tax on its profits before dividends, but not before most employer pension contributions.
• Your overall position depends on:
  • Company profit level
  • How much you need to live on
  • Whether you are basic‑ or higher‑rate
  • Whether you are using pension contributions as part of the mix 

What Budget 2025 has done is narrow the gap between salary and dividends. The old mantra “always take dividends” was already too simplistic. After this Budget, it is positively dangerous as a blanket rule.

Roughly speaking:

• Each £1,000 of dividends in the basic‑rate band will cost you an extra £20 of tax from April 2026 (2% of £1,000).
• The same is true for higher‑rate band dividends – another £20 per £1,000.

For many owner‑managers the answer will still be a blend:

• A sensible salary (often around the NI thresholds)
• Enough dividends to meet personal spending
• Plus, where appropriate, company‑funded pension contributions, which still give very powerful relief and are not affected by the new £2,000 salary‑sacrifice NIC cap if structured as straightforward employer contributions.

4. What if I also have rental properties or savings?

Many small‑Ltd directors also have:

• A buy‑to‑let or two, or
• A decent portfolio of interest‑bearing cash and investments.

Budget 2025 hits those areas as well:

• From 6 April 2027, there will be separate higher tax rates for property income:
  • Basic: 22%
  • Higher: 42%
  • Additional: 47% 
• From the same date, savings income tax rates also rise by 2 percentage points across the board. 

And from 2027 the law will change so that reliefs and allowances are used first against earned and trading income, and only afterwards against property, savings and dividends.  

In simple terms:

It becomes harder to “soak up” your allowances with dividends and rent. More of that income will be fully taxed.

For many small company owners, the combined effect is a gradual but noticeable ratcheting up of tax on all non‑salary income.

5. Compliance twist: late Corporation Tax returns get a lot more painful

While everyone is focused on dividend tax, there’s another change in Budget 2025 that matters to small Ltd owners:

Fixed penalties for late Corporation Tax returns will double for returns with a filing date on or after 1 April 2026. 

Current position vs new:

• First late CT return: penalty goes from £100 → £200
• More than three months late: £200 → £400
• Three successive late filings: £500 → £1,000
• Three successive returns more than three months late: £1,000 → £2,000  

For a typical owner‑managed company, that’s real money.

And that’s before any interest or tax‑geared penalties if HMRC think there is an underpayment.

The practical takeaway:

• Don’t leave your year‑end books and CT return until the last minute.
• If you use an accountant, get your records to them early – not three days before the deadline.

6. A quiet win: some small businesses get help on business rates

If your small Ltd trades from a shop, café, pub or other premises in England, there is one positive note in the Budget:

• From 1 April 2026, there will be permanently lower business rates multipliers for eligible retail, hospitality and leisure properties under £500,000 rateable value, set 5p below the standard business rates multipliers.  
• Transitional relief and “Supporting Small Business” schemes will cushion sharp increases after the 2026 revaluation, with extra protection for the very smallest properties.

So while your personal tax on dividends is going up, your business rates bill might actually reduce or rise more slowly, depending on your property.

7. What should small limited company owners do now?

Here are some practical steps to discuss – ideally before April 2026.

1. Map your expected drawings for the next 2–3 years

• Estimate what you actually need to live on each year.
• Work out, with your adviser, how much of that is likely to be salary, how much dividends, and whether your income will stay in basic rate or creep into higher.

Even a simple forecast can show you whether you’re looking at an extra £500, £2,000 or more in dividend tax each year.

2. Consider bringing forward some dividends (carefully)

Because the higher rates apply from 6 April 2026, there may be merit in:

• Taking slightly larger dividends in 2025–26, if:
  • You have distributable reserves and cash in the company;
  • You can stay within basic rate;
  • You’re not triggering other problems (loss of Child Benefit, tapering of allowances, etc.).

The goal isn’t to gorge on dividends for the sake of it; it’s to smooth your drawings across years so that less falls into the new, higher rates.

3. Re‑check your salary / dividend / pension mix

For many directors, the “ideal” mix may now shift slightly:

• Salary may move a little up or down, depending on how it interacts with NICs and thresholds.
• Company‑paid pension contributions may become relatively more attractive, because:
  • They are still deductible for Corporation Tax;
  • They grow in a tax‑advantaged environment;
  • They can help keep more of your total income in the basic‑rate band, so fewer of your dividends are taxed at 35.75%.
     

The Budget does cap NIC savings on salary‑sacrifice pension contributions above £2,000 a year from April 2029, but that affects salary sacrifice structures, not straightforward employer contributions paid from company profits. (GOV.UK)

4. Make use of your household

If you have a spouse or civil partner with unused allowances:

• It may be worth them owning genuine shares in the company and receiving some dividends in their own name, so you use both sets of bands and allowances.
• This must reflect real commercial ownership and risk – not just “paper income shifting” – but done properly it remains very effective.

5. Get your compliance house in order

Given the doubling of Corporation Tax late filing penalties from April 2026, now is a good time to:

• Tighten bookkeeping
• Move to cloud accounting if you haven’t already
• Agree clear timelines with your accountant for year‑end accounts and tax filings

Think of it as insurance against totally avoidable penalties.

8. Final thoughts

For most owners of small UK limited companies, Budget 2025 doesn’t change the logic of being incorporated – but it does change the maths of how you take money out.

In short:

• Dividends are still powerful, but the tax saving is smaller.
• Rental and savings income will also come under more pressure from 2027.
• Being late with your Corporation Tax return just got significantly more expensive.

The good news is that with some forward planning – especially around how much you draw, when, and in what form – you can soften much of the impact.

If you own a small limited company and want to sanity‑check your extraction strategy before the new rules hit, we can walk through the numbers with you:

Website: www.vectigalistax.co.uk
Mail: angelo@vectigalistax.co.uk
 

This post is a general overview only and must not be relied upon as tax or legal advice; no action should be taken on the basis of it without obtaining specific professional advice tailored to your circumstances