The silent tax rise no one talks about
In the 2025 Budget, the Government didn’t hike income tax or National Insurance rates, but they did something far more subtle.
They froze tax and NIC thresholds until April 2031.
For small business owners and directors, this is a stealth tax rise. As your profits and salary increase with inflation, more of your income is dragged into higher tax bands, even though the headline rates haven’t changed.
What this means for small business owners
Here’s how this “fiscal drag” hits you in practice:
- Director’s salary planning gets tighter
The classic low salary / higher dividend mix will be affected because more salary is pulled into the basic and potentially higher band over time. - More people tip into higher-rate tax
You may find that a modest rise in profits pushes you into 40% tax sooner than you’d expect. - NIC becomes a bigger cost over time
With thresholds frozen, both employer and employee NIC may bite on more of your pay.
Example: why the same salary costs you more
Suppose you pay yourself a salary of £50,000 from your company.
- In year 1, only a portion sits in higher-rate tax.
- A few years later, with the threshold frozen but pay increased a little, more of that income is taxed at 40%, even though nothing “officially” changed.
That’s fiscal drag in action.
How to respond, not just react
Rather than simply accepting higher tax bills, you can build a plan around it.
Practical actions to take
- Review your director’s salary and dividend mix annually
Don’t set and forget. Re-run the numbers each tax year to check the most efficient combination of salary, dividends and employer pension contributions. - Use pensions more strategically
Employer pension contributions can move profit out of corporation tax and personal income tax, while building your retirement pot. - Forecast your personal tax 3–5 years ahead
Look at your expected profits, drawings and threshold freezes together. Spot when you’re likely to hit higher-rate tax and plan before it happens. - Consider involving a spouse or partner
If they genuinely work in the business, using two sets of personal allowances and bands can reduce the family tax bill. - Build tax planning into your management accounts
Don’t wait until after your year-end. Review profit and drawings quarterly so you can adjust mid-year.
How We can help at MDH
Book a quick tax chat with me no strings attached. We’ll have a look at your situation and spot opportunities you might be missing. And as a thank-you, I’ll send you a free copy of our book 75 Ways to Pay Less Tax, packed with simple, practical tips you can put to work straight away. Let’s make sure your money’s working smarter, not harder.
