UK Autumn 2025 Budget

Rachel Reeves’ second budget as Chancellor introduces £26 billion in revenue raising measures, including an extended freeze on tax thresholds, tax increases for dividends, savings and rental income and changes to salary sacrifice.

Good News from the Budget

• The rumors about removing the 25% tax free cash from pensions have not materialised (again)!
• Tax relief on pension contributions reducing – no change
• No further increases to employers or employees NI contributions have been announced this year.
• There was speculation that the current seven year “Potentially Exempt Transfer” period needed for making a gift free of inheritance might be increased to ten years. This has not happened.
• A possible “Lifetime Cap” on gifting money to children has not been included.
• The triple lock on State Pensions will be retained for the remainder of this parliament, guaranteeing a 4.8% earnings-based increase in April 2026.

The Main Changes:

• Income Tax Thresholds – Staying Frozen

Of particular interest is the “Personal Allowance” of £12,570, which is how much we can earn before paying tax. Also, the “Basic Rate” tax band, within which we pay 20% tax. This jumps to 40% when earnings exceed £50,270.

These limits were first put in place in April 2021. The Government then said these limits would be frozen until April 2028. In this week’s budget, this has been pushed backward again to 2031.

This will mean a period of 10 years with NO increases, which is an incredible amount of time. For context, ten years earlier in 2011, the personal allowance was £7,475. So over that 10-year period it
has increased by 68%. If our current £12,570 allowance had increased by 68% over 10 years, then by 2031 it should have been £21,117.60. However, it will still be £12,570!

With thresholds not rising, it pushes many non-taxpayers into paying tax. Also, basic rate taxpayers get pay rises pushing them into the 40% tax bracket. This is called “Fiscal Drag”. This is a way of
increasing the tax intake, without putting up rates of tax. Interestingly, the new basic state pension payable from April 2026, is due to be £12,547.60. This will be only £22.40 lower than the personal
allowance. So, when the pension increase in April 2027 is made, many pensioners will have to pay tax on their State Pension.

That will be a difficult moment for the Government as this has never happened in history, and it highlights how effective the threshold freeze has been. In the budget document the Government says
it will “Ease the administrative burden…” for pensioners who will have never before made a tax return. Further details will follow in 2026.

• Putting an NI Cap on “Salary Sacrifice”

This is a tax-efficient system, explained best with an example. An employee on a salary of £65k, could ask the employer to “sacrifice my salary” to only £50k, with the missing £15k instead being paid into their pension. This is very tax efficient, as it prevents the employee from paying any tax at 40%. The missing £15k will actually be £17,250 because the employer will normally pass on their employer NI saving and pay that into the employees’ pension too. The employee will also save on NI as they are only paying NI on £50k and not £65k.

From 2029 however the amount that can be sacrificed to qualify for the NI saving is going to be limited to only £2,000. It will still be possible to salary sacrifice more than £2,000, however, the amount over this would no longer benefit from the NI saving.

This is arguably a counter intuitive move, as generally speaking the Government is trying to ensure people have sufficient pension savings to avoid them needing state benefits. However, the current Government are seeing this as a tax loophole, rather than responsible future planning. An unintended consequence of this could be that people actually start a salary sacrifice scheme with their employer, before it is curtailed in 2029.

• ISA Changes and Lower Limits

The Government believes that too many people are investing in Cash ISAs, where returns are secure, but low. They would prefer that Stocks and Shares ISAs are used, as this could mean more money is invested in UK Companies, which would help to drive growth.

From April 2027, the Government has therefore reduced the limit from £20k to just £12k for Cash ISAs, unless you are over 65. For Stocks and Shares ISAs the limit is staying at £20k, to help encourage investment in UK companies, instead of holding cash. This will probably not have the desired effect however and could just add more complexity to the ISA landscape. This is because:
• Few people could pay in £12k or the full £20k anyway.
• Those that do want to pay in more would probably pay the excess into Premium Bonds. These are a similar tax-free, low risk savings product. (And Government backed).
• It would be possible to invest £20k in a “Short-Term Money Market” fund in a Stocks and Shares ISA. Although not cash, they behave in a very similar way and would also return about 4% a year, tax free.
• Those that are coerced into investing into a Stocks and Shares ISA, probably wouldn’t have it invested all in the UK anyway. The UK typically only makes up 4% of the assets in global equity funds. The investor might use an American or European fund, which holds no UK companies at all.

The Government has also announced it is going to be stopping the “Lifetime ISA”. This has long been criticised for having mixed objectives, and being too inflexible for young people, with many withdrawing money early and paying penalties. In 2026 it will consult on bringing in a “First Time Buyer” ISA, which sounds to have a clearer objective.

• Tax Relief on Venture Capital Trusts (VCT) reducing from 30% to 20%

Although not a mainstream product, these were useful for people to reduce their income tax bill, so long as they were prepared to invest in small start-up companies. The downside is these are riskier than normal investment funds. You must be prepared to lose a lot, or all your money.

Smaller companies can’t easily get investment from banks, as they are considered too risky to lend to. However, small British companies do need investment money from somewhere, so they have the chance to get off the ground and grow. So, reducing the tax relief available from 30% to 20% does seem an unusual move, especially as the Government is trying to promote growth in British companies.

The Government is seeing VCTs as too much of a tax benefit for investors, rather than a benefit for UK businesses or the UK economy, which seems questionable. (Microsoft started life small, in a garage in 1975).

• Dividend and Savings Tax

While Income Tax rates have stayed the same, from April 2026, dividend and savings rates will rise by 2%. The rationale is that these earnings don’t come from “Employment Income”, so it’s considered to be more of a type of “Tax on Wealth”, in the same way that properties over £2m are due to face an extra annual tax charge.

The rise in dividend tax won’t be welcome for people who run Limited Companies, where taking a dividend is a standard method of taking income, after the normal corporation tax on profits has been paid. (Many limited companies are just one-person businesses).

• Rental Income
From April 2027, the rates of tax on property income will be 22%, 42% and 47%, depending on whether such income falls in the basic, higher or additional rate bands

• Electric Vehicle (EV) Tax Changes
We have to make long-term economic decisions when buying a car, as they cost us a lot of money initially, and on an ongoing basis. In the 1990s we were incentivised to have cars with engines smaller than two litres. Then, in the 2000s we were pushed to have diesel cars. More recently we have been incentivised by the tax system to have EVs. The tax benefits for EVs were initially very appealing:
• No Road Tax. (But now £195, the same as for petrol cars. If the EV costs more than £50k, the first-year tax is now £620).
• Avoiding the fuel duty from petrol. (EVs will now be charged three pence per mile from 2028).
• Freedom from the London Congestion Charge. (EVs to be charged £13.50 a day from 2nd January).