Setting the Scene: The Economic Backdrop
The UK economy, we’re told, is “outperforming growth forecasts,” with GDP growth for 2025 upgraded to 1.5% (which, in the current climate, is the economic equivalent of finding a fiver down the back of the sofa). Inflation is still a persistent houseguest, forecast at 3.5% this year and 2.5% next.
The Chancellor, Rachel Reeves, we are told has inherited a public purse with a “black hole”, although this claim has proved controversial in the light of OBR forecasts of increased tax receipts. But the Government still wants to raise revenue to build ‘fiscal headroom’ and thanks to Labour’s election pledge, she’s sworn off the obvious choices of raising income tax, National Insurance, or VAT rates. Instead, we’re treated to a long list of tax tweaks and freezes, all designed to raise revenue without, she tells us, technically breaking any promises. The result of this is an anticipated additional £26bn raised in taxes each year, so whatever she may say taxes are going up.
The Main Tax Impacts: What Matters for Individuals
1. Income Tax: The Stealthiest of Stealth Taxes
Here lies the biggest elephant in the room. No rate rises for employment or self-employment income, but the freeze on income tax thresholds has been extended to 2030-31. This means as wages rise, more people are dragged into higher tax bands—a process known as “fiscal drag.” The OBR estimates this will create 920,000 new higher-rate taxpayers by the end of the decade!
The rates of income tax applied to savings income (e.g. bank interest) will each rise by 2% from 6 April 2027 taking the basic rate to 22%, the higher rate to 42% and the additional rate to 47%. Apparently ‘working people’ don’t earn interest so taxes aren’t going up, right?
The basic rate and higher rate of income tax applied to dividends will each rise by 2% from 6 April 2026 to 10.75% and 35.75% respectively. The additional rate is to remain at 39.35%.
2. Cash ISA Allowance: Encouraging Risk?
The annual cash ISA allowance is being slashed from £20,000 to £12,000 from April 2027, though savers over 65 are spared the cut. The Treasury’s spin is that this will nudge savers into shares ISAs, boosting investment. In reality, falling interest rates may achieve the same thing anyway. The ISA system, already labyrinthine, just got more complicated.
3. Pension Salary Sacrifice: The End of a Perk
From April 2029, only the first £2,000 of salary sacrifice pension contributions will be exempt from National Insurance. Above that, standard NI charges apply. This is expected to raise £4.7 billion and will hit higher earners who use salary sacrifice to boost retirement savings, as well as imposing yet more Employer’s National Insurance on employers who have already adopted these arrangements for their auto enrolment pension schemes.
4. Mansion Tax: The Price of a Nice View
A new “mansion tax” (though the Chancellor would rather you didn’t call it that) will apply to properties worth over £2 million from April 2028. Expect to pay £2,500 for homes between £2m and £2.5m, and up to £7,500 for those at £5m and above. This is projected to raise £0.4bn and will be of particular interest to clients living in inner London.
Business Taxation
5. Corporation tax
The Corporation Tax main rate remains fixed at 25%, which we are told is a competitive rate by the standards of the G7 group of nations, however, this is scant comfort given it was 19% just 3 years ago.
Various changes are being made to capital allowances, however, given that the annual investment allowance remains set at £1m and we have full expensing there are comparatively few SMEs that claim writing down allowances annually. For those that do, the main pool rate is now 14% meaning that it can take more than 7 years to receive 2/3 of the tax relief on equipment purchases.
In a small victory for companies, the Government has backed away from the proposal to bring medium sized groups within the scope of transfer pricing legislation, which would have benefitted nobody except for tax advisors.
6. Employee Ownership Trusts (EOTs)
Perhaps unsurprisingly, the Government has found that offering an 100% relief from Capital Gains Tax (CGT) on the disposal of a controlling interest in a company to an EOT has resulted in a lot of this type of activity – more than they apparently budgeted for! They have therefore cut the relief to 50% of the gain being made, which together with the increase in CGT rates last year makes the effective rate on such gains likely to be 12% going forward. The Government will legislate to prevent Business Asset Disposal Relief (BADR) being claimed on such transactions.
6. Other Notables
Thanks to successive governments’ penchants for delayed implementation of tax rules, we are still bracing ourselves for mandatory payrolling of benefits-in-kind, making tax digital quarterly Income Tax submissions and major changes to Inheritance Tax. We are also in the first full year of the new ‘merged’ R&D Tax Credits scheme.
In all the excitement of this Budget it’s important not to lose sight of these other changes and to continue to plan for them!
The Takeaway: Fiscal Drag, Not Fiscal Magic
This year’s Budget is a masterclass in raising revenue without raising the main rates of Income Tax, National Insurance or VAT. Make no mistake, nearly all of us will be paying more tax in due course as a result of these changes.
If you’d like to discuss how these changes affect your business or personal finances, or if you just want to commiserate over a cup of coffee, get in touch.
About the author
Pete Heslington is a Chartered Tax Advisor (CTA) and Trusts and Estates Practitioner (TEP).
Pete’s expertise crosses many sectors and taxes. He focuses on bespoke tax planning and structuring covering corporate tax, mergers and demergers, acquisitions and sales, exit and remuneration planning, share schemes, partnership taxation, investment planning, wills and probate.
