With the Autumn Budget 2025 on the horizon, many limited company contractors are wondering whether the £500 dividend allowance could be next in line for Rachel Reeves' red pen.
My fellow accountants and I here at SG have already been asked this a lot, and Autumn Budget 2025 is still over a fortnight away, writes SG Accounting boss Dan Mepham.
The Treasury's dividend squeeze, more of the same on Nov 26th?
Our view is that while anything is possible in the current fiscal climate, a further cut to the dividend allowance looks unlikely.
Still, given the allowance's turbulent history and the Treasury's record of squeezing dividend income, it's worth keeping an eye on the bigger picture.
The rise and fall of the dividend allowance
The dividend allowance was introduced in April 2016, replacing the old dividend tax credit system. Originally set at £5,000, the allowance was intended to simplify dividend taxation and encourage small business investment.
That simplicity didn't last.
The dividend allowance has been steadily reduced over time:
- 2018/19: Cut from £5,000 to £2,000
- 2023/24: Reduced again to £1,000
- 2024/25: Halved to £500 (its current level in 2025/26, too).
A token gesture to company directors
Each cut has been part of a wider Treasury strategy to raise revenue from small company owners without increasing the main dividend tax rates.
For many contractors who operate as their limited company's sole director, the allowance has shrunk — not just financially, but also from being a valuable planning tool to little more than a token gesture.
Four reasons Reeves is set to leave the dividend allowance alone
There are four main reasons why we believe the chancellor will leave the £500 allowance untouched this autumn:
- It's already minimal. Abolishing the allowance would raise only a modest amount of extra revenue. The administrative and political costs likely outweigh the benefit to HM Treasury.
- Political context. With a government that's still relatively new, the focus is likely to be on economic stability and restoring business confidence rather than introducing new tax rises. A further cut to the dividend allowance would send the wrong signal to small business owners and contractors.
- Administrative simplicity. The allowance prevents small investors from needing to register with HMRC for self-assessment for very low levels of dividend income. Scrapping it could create more work for both taxpayers and HMRC.
- Other priorities. The Treasury has larger levers to pull, such as income tax thresholds, capital gains, or corporation tax receipts, if it needs to boost revenue. Dividend policy simply isn't the most effective tool right now.
If the allowance stays, what other dividend risks are at Budget 2025?
Even if the dividend allowance stays put, contractors shouldn't assume dividend taxation is off the table entirely.
We could see dividend rate adjustments rather than a cut in the allowance.
The current dividend tax rates — 8.75%, 33.75%, and 39.35% — are relatively easy for the Treasury to tweak.
As well as adjustment, beware alignment…
Another possibility is a gradual alignment of dividend and employment income tax. That's an idea that seems to surface whenever fiscal pressures rise.
There's also the quieter option of threshold freezes, allowing inflation to do the work of raising more tax without any headline-grabbing announcements.
What if the chancellor does axe the £500 dividend allowance?
If this month's budget scraps the dividend allowance altogether, the direct impact on most contractors would be modest, but noticeable.
A basic-rate taxpayer would pay an extra £43.75 on £500 of dividend income.
The symbolic effect would be bigger. Each reduction undermines the perceived advantages of working through a limited company and reinforces the sense that small business owners are an easy target for stealth taxation.
Plan with perspective if you're a contractor-director…
For contractors directing their own limited company (also known as a personal service company), the key takeaway is not to make decisions before all the details are known.
Instead, focus on flexible and efficient remuneration planning — balancing salary, dividends, and company reserves in a way that works under current rules but can adapt if the landscape shifts.
TL;DR: Dividend allowance at Budget 2025 — stay, cut, or go?
Our expectation at SG Accounting is that the £500 dividend allowance will remain in place for 2026/27.
However, that stability shouldn't be mistaken for permanence. The direction of travel over the past decade is clear: dividends are under closer scrutiny than ever.
Final thought: Keep calm (and talk to a top accountant)
Whatever the chancellor announces on Wednesday November 26th, contractors who keep their finances under regular review will be in the best position to respond calmly — and tax-efficiently — to any future changes.
