Budget Dividend Tax Increase Deals Another Blow to Limited Company Contractors
The Autumn Budget has raised the ordinary and upper dividend tax rates by two percentage points, directly reducing the income retained by contractors who pay themselves through company dividends.
Limited company contractors faced another increase in their personal tax bills after Chancellor Rachel Reeves used the Autumn Budget on 26 November 2025 to raise two of the three dividend tax rates.
From 6 April 2026, the ordinary dividend rate would increase from 8.75 per cent to 10.75 per cent, while the upper rate would rise from 33.75 per cent to 35.75 per cent. The additional rate would remain at 39.35 per cent and the tax free dividend allowance would stay at £500.
The decision directly affected contractors operating outside IR35 through personal service companies, many of whom drew a modest salary and received the remaining income as dividends.
Contractors face hundreds of pounds in additional tax
The precise cost depended upon the amount of dividend income and the taxpayer’s other earnings. IT Contracting calculated that a director taking a salary of £12,570 and dividends of £37,700 would pay approximately £750 more each year. SG Accounting estimated that a contractor receiving around £40,000 in annual dividends would pay roughly £800 more, while a person receiving £90,000 could face an increase of approximately £1,800.
The dividend allowance had already fallen from £5,000 in 2016 to 2017 to only £500, while company profits could be taxed before the remaining income was distributed.
The dividend measure was forecast to raise £280 million in 2026 to 2027, £985 million the following year and £1.39 billion by 2030 to 2031. The official Budget argued that asset income should be taxed more closely to earnings.
Business groups criticise the decision
The distinction was disputed by business and investment advisers, who pointed out that dividends are paid from profits that may already have been taxed at company level.
Jason Hollands, managing director at Evelyn Partners, said: “The last thing the UK really needs right now is more tax on investment and entrepreneurship.”
He said small company owners could not shelter shares in their own businesses within an Individual Savings Account and often relied upon dividends because cash flow was uncertain. Evelyn Partners called the increase damaging to entrepreneurs.
The contractor sector viewed the change alongside the off payroll reforms, successive reductions in the dividend allowance and a main corporation tax rate of 25 per cent for sufficiently profitable companies.
Limited options for personal service companies
Contractors could consider taking dividends before the new rates began, but doing so could move income into a higher tax band or create an earlier tax liability. Any decision therefore depended upon individual circumstances and required professional advice rather than a general rush to extract company funds.
Direct company pension contributions remained a planning option where appropriate. The separate salary sacrifice restriction from April 2029 did not automatically prevent genuine employer pension contributions.
The increase narrowed the financial difference between independent work and employment. A personal service company still offered limited liability, control over retained profits and the ability to serve multiple clients, but the salary and dividend model became less rewarding.
The Budget did not alter IR35, but imposed a measurable cost upon genuine businesses. From April 2026, every pound of dividends within the ordinary or upper band would carry another two pence of tax.