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UK self-employed workers, from limited company contractors to sole traders, are facing a relentless squeeze on their take-home pay and retirement plans, driven by impending tax hikes and new mandatory compliance rules for the 2025/2026 tax year
With the Autumn Budget on November 26th approaching, the Chancellor has repeatedly “refused to rule out raising taxes” according to multiple news reports, stating that she must “deal with the world as I find it, not the world as I might wish it to be.”
This is widely interpreted as preparing the ground for a tax increase that breaches the manifesto promise.
Limited company solo self-employed face higher scrutiny
Limited company directors, who rely on dividends for tax-efficient profit extraction, are now facing a tax hike risk combined with increased state scrutiny.
The government is widely rumoured to be considering a trade-off: a 2p rise in Income Tax matched by a 2p cut in National Insurance Contributions (NICs). This move is highly punitive for owner-managers for two reasons:
- Dividend disparity: If Income Tax rates are raised, it hits directors who pay themselves via dividends because dividends are subject to Income Tax but not NICs, meaning the director gets the tax rise without the corresponding tax break.
- Existing rates: Already, the Dividend Allowance has been aggressively cut to just £500 for 2025/2026 and dividends above this are taxed at significantly higher rates: 8.75% (Basic Rate), 33.75% (Higher Rate), and 39.35% (Additional Rate).
Starting with the 2025/2026 tax year, directors of most owner-managed businesses must provide mandatory enhanced disclosures on their Self-Assessment Tax Returns (SATRs).
Company details: Directors must provide the Company Registration Number and their highest percentage shareholding for the year.
New penalty: A £60 fine can be charged for each failure to correctly supply the additional information.
What to sell your company? It’ll cost you
Sole traders and company directors planning to sell their businesses face a dramatic increase in Capital Gains Tax (CGT) due to statutory rate changes:
Business Asset Disposal Relief (BADR) hike: The preferential 10% tax rate under BADR on the first £1 million of profit from a business sale is rising sharply:
- It increased to 14% from April 6, 2025
- It is scheduled to increase again to 18% from April 6, 2026
Standard CGT Rates: For all other assets, including investment property, the tax rates for the 2025/2026 tax year are 24% for higher and additional rate taxpayers and 18% for basic rate taxpayers. This increase means a business owner selling for a £1 million gain could pay significantly more tax over the next two years.
Stealth tax squeeze: Frozen thresholds
For all self-employed people, the most effective tax generator for the Treasury remains the freeze on Income Tax thresholds.
- The Personal Allowance remains at £12,570 [https://www.gov.uk/income-tax-rates].
- The Higher Rate Threshold (HRT) remains at £50,270
This ‘fiscal drag’ pushes more of the UK’s self-employed worker income into the 40% tax bracket as earnings rise..
This squeeze is compounded by the rollout of Making Tax Digital (MTD) for Income Tax, which mandates quarterly digital reporting for sole traders and landlords with income: over £50,000 from April 2026 and over £30,000 from April 2027.
The consensus among analysts is that “fiscal tightening is hugely likely in November”, making preparation for increased tax bills a must for the UK’s independent workforce.
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