Autumn Budget 2025

At last the economic uncertainty is over and Rachel Reeves has delivered her second budget, with much of the speculation around pension reforms failing to materialise. However, she has introduced measures to raise £26 billion in revenue, including an extended freeze on tax thresholds, tax increases for dividends, savings and rental income and changes to salary sacrifice.

Here are the headline points to assist in your planning:

Income tax and National Insurance

·         As predicted, the Chancellor backtracked on her promise to increase thresholds from 6 April 2028 by extending the freeze by a further 3 years, to the end of the tax year 2030/31. The income tax Personal Allowance will stay at £12,570, higher rate threshold at £50,270 and additional rate threshold at £125,140.

·         This freezing tactic, known as fiscal drag, will bring in over £23 billion over the 3-year period.

·         The secondary threshold for NICs will also be frozen at £5,000 until 2030-31. This is the threshold above which employers must collect and pay NI on an employee’s earnings. There were no increases to NI rates.

Dividends, Savings Income and Property Income

·         From April 2026 dividends taxed at the ordinary rate and upper rate will increase to 10.75% (currently 8.75%) and 35.75% (currently 33.75%) respectively. There will be no changes to the additional rate which remains at 39.35%. The dividend allowance is unchanged at £500 pa.

·         From April 2027 tax on savings income (e.g. deposit interest) will increase by two percentage points in each tax band. Savings income falling in the basic, higher and additional rate bands will therefore be taxed at 22%, 42% and 47% respectively. The increases will also apply to chargeable event gains on investment bonds which are taxed as savings 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.

These rises emphasise the importance of sheltering tax on dividends and savings in ISAs where possible (or a pension for longer term savings). The increases as applied to offshore bonds can be countered where withdrawals triggering a taxable gain can be taken within unused allowances.

ISAs

·         The overall annual ISA limit was retained at £20,000, from April 2027, but only individuals aged 65 and over will be able to save the full £20,000 into a Cash ISA.

·         For those under 65, the Cash ISA limit will be capped at £12,000, with the remaining £8,000 allowance available only for investment into a Stocks and Shares ISA. 

·         There will also be a consultation on reforming Lifetime ISAs. The proposal will be to replace Lifetime ISAs with another ISA product aimed at first time buyers. The consultation is expected to be published in early 2026.

·         The £9,000 limit for Junior ISAs and Child Trust Funds remains until 5 April 2031.

·         The speculation regarding a mandated investment level into UK equities did not materialise, although it was announced that some financial services firms have committed to providing new, easily navigable ways for clients to find the right UK investment for them.

Pensions

There were no changes made to tax-free cash rules or tax relief applied to contributions.

Salary sacrifice – limit on NI exemption

·         From April 2029, the National Insurance (NI) exemption for pension contributions made by salary sacrifice will be limited to £2,000 a year. This means that both employees and employers will have to pay NI on any salary sacrificed over this amount.

·         So, for example, in a scheme where employees make pension contributions of 5% of earnings via salary sacrifice, this would impact employees whose earnings exceed £40,000.

·         The change will have the biggest impact on those earning below the upper earnings limit (UEL) – currently £50,270 - as they will have to pay NI of 8% on any amount sacrificed over £2,000. NI for employees on earnings above the UEL is 2%. Employers will have to pay NI of 15% on any salary sacrifice over the £2,000 limit.

·         Those affected will see a reduction in their take home pay - but that may not be the only consequence. Employers often agree to share part of their NI saving with employees by boosting their pension contributions, so this change will likely result in a smaller pension pot at retirement for many employees.

·         It may be beneficial for some employees to still sacrifice salary above the limit or to make personal contributions into a pension to continue to receive Child Benefit or tax-free childcare.

·         Ordinary employer pension contributions will remain exempt from NICs – meaning private sector will be disproportionately affected.

It is therefore important that clients maximise their salary sacrifice contributions while the existing rules continue to apply.

IHT on unused pension funds

·         The government are going to allow the personal representatives (PRs) to instruct pension scheme adminstrators to withhold 50% of taxable pension death benefits for up to 15 months. This is to ensure there is sufficient money available to meet the IHT liability applicable to that pension scheme. Pension beneficiaries will only be able to access 50% of the amount they inherit where the PRs have instructed the scheme.

·         PRs will also not be liable for IHT due on any pensions which come to light after the administration of the estate has been completed. The pension beneficiary will continue to be liable for any IHT on pension discovered after the PRs have been discharged.

State Pensions

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.

This means that the full New State Pension will increase to £241.30 a week (£12,547.60 per annum) and the full Basic State Pension will increase to £184.90 a week (single person) or £295.70 a week (married couples and civil partners).

With State pensions for some pensioners likely to exceed the Personal Allowance (PA) from April 2027 due to the triple lock and the freezing of the PA, the government is exploring how best to ensure that pensioners, whose only income is the Basic or New State Pension, don't have to pay small amounts of tax via Simple Assessment.

Inheritance Tax

The Inheritance Tax nil rate band of £325,000, main residence nil rate band of £175,000 and the combined agricultural and business property relief allowance of £1 million are also frozen until April 2031.

There were no changes to the IHT gifting exemptions, which will remain as now.

Gifting remains a key strategy for mitigating IHT. As thresholds are frozen and asset values increase, more clients will benefit from making use of annual and lifetime gifting exemptions to reduce the value of their taxable estate.

Mansion Tax

The chancellor announced the introduction of a new High Value Council Tax Surcharge on properties worth £2 million or more, from April 2028. The surcharge is payable by the homeowner and is in addition to any existing council tax.

Properties will be valued by the Valuation Office and the surcharge applied as follows:

Property Value	Surcharge
£2,000,000 - £2,500,000	£2,500
£2,500,000 - £3,500,000	£3,500
£3,500,000 - £5,000,000	£5,000
£5,000,000 +	£7,500

A consultation will be issued on the application of the charge for properties with complex ownership structures such as trusts and businesses.

Other important points to note

Venture Capital Trusts

VCT schemes will see upfront Income Tax relief reduce from 30% to 20% from April 2026.

Order of taxation

From April 2027, the income tax ordering rules will change, meaning that the personal allowance must be set against earned income and pensions before dividend income, savings income and property income.

Why is this relevant? Income taken from pensions will be taxed at a lower rate than savings or property income.

Bonds remain a powerful tool for tax deferral. Life insurers expect the rate of life company corporation tax to increase to 22% in April 2027, but this has not been confirmed.

Transferable business relief and Agricultural relief

The Chancellor has confirmed that any unused £1 million allowance for business relief and agricultural relief will be transferable between spouse and civil partners. This will be effective for deaths after 6 April 2026 when the new cap on relief at 100% comes into force.

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