2025 Autumn Budget: what’s changed, what’s looming

The new OBR (Office for Budget Responsibility) forecast shows a bit of a mixed picture for the UK economy overall, modest growth, but a heavier tax burden is on the horizon. Real GDP (Gross Domestic Product) is expected to grow at about 1.5% in 2025, though the underlying ‘potential’ growth rate has been revised down.

At the same time, the forecast highlights a shift in the tax (and fiscal) landscape: because personal tax thresholds and allowances are being frozen, and a raft of other measures is due to bring in more revenue, the overall tax take is set to climb

Bottom line: as someone operating as a contractor through a limited company you might well feel squeezed in various ways over the coming years.

What this means if you’re a limited-company contractor

‘Fiscal drag’ – pay rises that don’t feel like pay rises

Because personal income tax thresholds are frozen, rather than rising with inflation or wages, even modest increases in your income may push more of it into higher tax bands. That means:

• Even if you raise your day rate or win more contracts, a bigger share of that goes away in tax
• For contractors who draw salary and dividends, operting outside of IR35, this quietly eats into ‘take-home pay’.

This effect, where inflation or nominal wage rises push people into higher tax bands, is sometimes called ‘fiscal drag’.

So, you could be working harder or smarter but see less benefit than you expect.

Corporation tax and small-company squeeze

The OBR’s projections show that after the increase to 25% corporation tax (applying since April 2023), on-the-book corporation tax receipts are expected to keep rising.

For many limited companies run by contractors that means:

• More of your company’s profits will go to HMRC
• Unless you deliberately reinvest profits or structure withdrawals carefully, your net returns after tax could shrink.

This is especially relevant if inflation and cost pressures are biting, or if business income doesn’t grow much.

Pension & salary sacrifice changes. Subtle but significant

One of the headline measures flagged by the OBR and the recent Budget is a plan to cut the tax perk on salary sacrifice pension contributions above £2,000 per year. From April 2029, contributions over that threshold will lose their National Insurance (NI) exemption.

If you use a limited company and salary sacrifice into a pension, which is a common tax efficient strategy for contractors, that might:

• Make pension contributions less attractive (or less efficient) for the higher portion, reducing a key retirement-planning benefit
• Mean you’ll feel the pinch not just personally, but also in how you run your company finances.

Given that many contractors like to use a mixture of salary + dividends + pension contributions, this tweak could require some rethinking of how you draw and save money.

Higher tax takes even if income remains ‘normal’

Because the OBR forecasts more of the national income will come from labour (rather than say, property or passive investment), and because of frozen thresholds plus tax rises, overall tax receipts are expected to rise significantly.

For a freelancer or contractor, this could translate into:

• Less disposable income after drawings, especially if you don’t adjust your invoices or rates to match.
• Potential pressure to raise rates, but that might come with its own risks around competitiveness, cost of living for clients, or losing business.

What to think about and what you might do

You’re probably asking yourself: “Okay, so what do I do about it?” Here are a few thoughts (not financial advice, just… well, thinking out loud).

• Review your pay structure. If you’ve been relying heavily on salary + dividends + pension sacrifice to optimise your tax/NI position, now’s a good time to re-evaluate. Maybe a different mix works better given the new rules.
• Factor in hidden ‘tax drift’ when setting future rates. If your income next year means higher tax or NI, build that into your day rate or contract bids quietly, but realistically. Speak to your agency about this as they will likely be doing the same.
• Plan for pension differently. If salary sacrifice perks shrink after 2029 (or interest rates or inflation mess with real term returns), you may need to look again at retirement saving strategy.
• Budget for leaner ‘take-home pay’. Increases to corporation tax, frozen allowances and higher overall tax take mean you might bring home less for the same work done. Adjust personal budgets and business forecasts accordingly.
• Keep an eye on long-term costs. Inflation, interest rates and slower productivity growth mean broader economic headwinds that the OBR forecast could hit your business costs, client demand or contract stability.

The big picture: what this means for the contractor community

It’s not all doom and gloom, but it’s a shift. The environment for limited company contractors is getting tougher. Contracts might get leaner; the ‘tax planning sweet spot’ has narrowed.

In effect, what used to feel like clever structuring may now feel more like balancing a tightrope. You’ll have to be sharper. More deliberate. Maybe more conservative about payouts. The squeeze could change how attractive contracting feels and could nudge some people to rethink their business model, or even return to PAYE employment – though that’s not a decision to take lightly.

But: if you stay alert, flexible, forward thinking and build in a bit of buffer you can navigate this. Consider tweaking your business plan, maybe raising your rate, and maybe re-structuring how you draw profit.

Final thoughts: a wake-up call, but also an early warning

We reckon what the 2025 OBR forecast does for contractors is less about sudden cliff-edges, and more about creeping pressure.

You might not see a single game-changer, but over 2, 3, 5 years, the cumulative effect could dent margins, slow growth, and make pensions less efficient.

So, treat this as a wake-up call, especially if you haven’t already been watching the signs. Review your day rate(s), revisit drawings and pension planning, and keep a close eye on overheads. Finally, why not speak to an expert like fellow Vestura Group company Oakwood Capital Wealth Management for a free, no-obligation chat? They specialise in contractors and their finances and can advise on the best way forward for you and your individual circumstances.