As ever, in the immediate aftermath of the Budget speech, there is limited detail available, but we will be watching the announcements in the next few weeks and will update clients as relevant details emerge. In the meantime, here is our initial take on the main Budget tax measures that we expect to affect our clients.
Individual taxes
The extended freezing of personal allowances and thresholds was a surprise to no-one, albeit that the freeze is now due to extend through to 2031, a year longer than expected. Given that Rishi Sunak first used freezing as a way of raising tax by stealth in 2021, by the time allowances are re-rated, they will be ten years behind inflation. The threshold for higher rate tax would now be £63,075 if uprated for inflation, rather than the present £50,270, so it’s not hard to see how increasing numbers of taxpayers are being fiscally dragged into higher rate tax.
In an echo of the long abandoned ‘investment income surcharge’ from the 1980s, the government will introduce a 2% additional tax charge on property, dividend and savings income to compensate for the absence of National Insurance Contributions on those income sources. The dividend tax increase will take effect from April 2026 and the property and savings increases from April 2027. In total this measure is expected to raise £2.2bn by 2029/30. Landlords will see it as a further assault on their position and it remains to be seen whether the additional 2%, in conjunction with increased regulation, drives an exodus from the rental market.
There is to be a High Value Council Tax Surcharge in England for residential properties worth £2 million or more, from April 2028. The charge will be £2,500 per year for properties worth over £2m, with a scale of charges for property value bands and a top tier charge of £7,500 for properties worth over £5m. This charge will be based on updated valuations to identify properties above the threshold and will be in addition to existing Council Tax. We can envisage valuation disputes occurring around the margins of the various thresholds which could be expensive to administer.
Many employers offer their workforce the ability to sacrifice salary into a pension. This has the effect of eliminating the salary sacrificed for the purposes of calculating National Insurance Contributions for both employee and employer. The proposal is to cap the salary sacrificed at £2,000, meaning that employees who contribute up to £2,000 into their pension each year via salary sacrifice can continue to benefit in full, but employee and employer NICs will be charged in the usual way on the amount above £2,000. The new rules operate from 2029 and should make no difference to the position on income tax relief.
A measure that received plenty of advance publicity is ISA reform. Ms Reeves confirmed today that from 6 April 2027, the annual ISA cash limit will be set at £12,000, within the overall annual ISA limit of £20,000. Annual subscription limits will remain at £20,000. This is a more relaxed approach than the advance publicity might have led us to believe, particularly as there is a carve out for the over 65s who can continue to invest £20,000 in a cash ISA each year.
Motoring taxes have not escaped a review. The government is introducing Electric Vehicle Excise Duty (eVED), a new mileage charge for electric and plug-in hybrid cars, with effect from April 2028. Drivers will pay for their mileage on a per-mile basis alongside their existing Vehicle Excise Duty. Electric cars will pay half the equivalent fuel duty rate for petrol and diesel cars, and plug-in hybrid cars will pay a reduced rate equivalent to half of the electric car rate. A further £100m is to be spent on EV charging infrastructure.
Owner managed businesses
Many businesses will still be reeling from the hike to employers’ National Insurance Contributions in the 2024 Budget. Whilst employer contributions remain at 15%, the present Budget is now attacking one of the remaining ways in which employers could mitigate the impact of the hike by limiting the ability to use salary sacrifice for pension contributions. This takes effect from 2029, reflecting the administrative difficulty for both government and employers in making changes to pension systems. This also hits proprietors wanting to play catch up on pensions, having spent the early years of a business ploughing funds into its growth.
The increase in tax on dividend income will hit owner managers who traditionally take most of their reward from the business in the form of dividends. They will need to do some maths to establish whether the bonus or dividend route is the most tax efficient now.
Currently, shareholders who sell to an employee share ownership trust get a complete exemption from capital gains tax. This 100% exemption is to be reduced to 50% from 26 November 2025.
Some good news for companies that want increased employee participation. Enterprise Management Incentive Schemes (EMI) have long been an efficient way to promote employee share ownership, and the government is now increasing the company eligibility limits for the EMI scheme to allow scale-ups to join start-ups in offering tax-advantaged shares to employees and encourage their talent to help grow the company.
Other measures
In a Budget largely clear of measures on IHT, Ms Reeves confirmed that IHT thresholds would, like income tax thresholds, remain at their present level until 2031. This means that the nil rate band at £325k will have been unchanged since 2009. At least the government has been sensible on Business Property Relief, having now changed its mind on the 100% × £1m allowance being transferable between spouses – people were tying themselves in legal knots trying to avoid the IHT fallout from that.
As usual, there are several measures to try to clamp down on tax avoidance and evasion, including increasing the rewards paid to informants who provide HMRC with information where tax over £1.5m is recovered. With immediate effect, HMRC will pay rewards of up to 30% of the additional tax collected that would otherwise have gone unpaid.
Summary
After a summer of speculation, we feel a collective sigh of relief that the latest tax proposals are now out, so we know what we have to deal with. Relief also that some of the kites flown have not made it into the Budget. Pension tax-free cash, for example, has been the subject of Budget rumour both this time and last, but remains intact. The capital gains tax allowance remains at £3,000 this time and capital gains tax rates, having been changed in 2024, have escaped another hike. And, of course, the wealth tax that has appeared in leaks and briefings turns out to have got no further than an advisor’s shopping list.
The combination of this Budget and last October’s undoubtedly makes for tax headwinds for our clients, but we will be looking at all options to assist with efficient income and, where appropriate, succession planning.
Clare Munro is our Senior Tax Adviser. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.
What you need to know
Tax laws may change and taxation will vary depending on your own personal circumstances.