When the chancellor delivers Autumn Budget 2025 on Wednesday November 26th, one surprise could be a reduction in the VAT registration threshold — currently £90,000.
What would a lower VAT ceiling mean?
It's a move that would widen the VAT net for HMRC.
But for limited company contractors, the impact would unfortunately go well beyond extra admin, writes Kerry Newman, director at SG Accounting, specialists in contractor tax and accounting.
Three consequences of a VAT threshold cut
If the VAT threshold fell to £60,000, thousands of small businesses and contractors would suddenly need to do three things:
- Register for VAT with HMRC;
- Charge 20 per cent VAT, and;
- File digital returns.
That means extra paperwork, cashflow pressure and, for those serving non-VAT-registered clients, awkward pricing decisions.
Beware if you're already bunching
Some companies might even deliberately limit turnover to stay below the new threshold — behaviour already common on sight of the current £90k ceiling. Economists call this deliberate holding back of turnover "bunching" around the VAT cliff-edge.
It's businesses, in effect, capping growth to dodge registration.
A lower threshold would move that cliff-edge down the scale, catching many who have managed to stay just under it.
Levelling the playing field
Most limited company contractors are already VAT-registered, often by choice.
Registration lets them reclaim VAT on costs and have the option to use the Flat Rate Scheme (FRS) for simpler accounting.
Their bigger frustration has been competing with unregistered freelancers who can undercut them by 20 per cent when selling to non-VAT-registered clients.
A cut to the VAT threshold at Autumn Budget 2025 could narrow that price gap, bringing more small suppliers into the VAT system and levelling the market.
It might even boost perceptions of professionalism, as more service providers will carry VAT registration — an age-old hallmark of bonafide businesses.
VAT Flat Rate Scheme under review?
If a VAT threshold cut on November 26th triggers a surge of new registrations, HM Treasury might look again at the FRS (Flat Rate Scheme).
Tweaks to the "limited cost trader" rate or eligibility rules could follow, reducing one of the few financial upsides of registration.
Contractors who use the FRS to manage VAT efficiently should therefore keep an eye out for any post-Autumn Budget guidance from HMRC.
Small threshold or rate changes, 'tweaks' if you will, can make a big difference to net contractor take-home pay.
More potential pressure on MTD (Making Tax Digital)
More VAT registrants would mean more pressure on HMRC's Making Tax Digital (MTD) system.
Even compliant contractors could feel the knock-on effects: slower processing, longer response times, or tougher scrutiny as volumes rise.
For many, that would add risk rather than relief.
The big picture for contractors if Autumn Budget lowers the VAT ceiling
While some in business circles want the VAT threshold to rise to £100,000, others think the current level already distorts growth. Regardless of which camp is correct, moving it in either direction has trade-offs.
A cut to the VAT threshold would increase tax receipts and consistency, but at the cost of greater admin and compliance for small firms.
For contractors already in the Value Added Tax system, life wouldn't change dramatically — but the environment around them would. Expect fewer unregistered competitors, potential FRS adjustments, and more compliance noise from HMRC.
In a world with a lower VAT ceiling than today's, the challenge won't be joining the VAT regime; it'll be not 'hitting your head' — staying efficient under a much larger one.
