2025 Budget
Written by
Ray Coman
Delivered this afternoon, against a stated £30 billion shortfall in the public finances, Rachel Reeves’ second Budget prioritised widening the tax base rather than adjusting headline rates.
The overall tax burden will move to its highest post-war level, driven primarily by fiscal drag (the continued freezing of thresholds) alongside targeted measures on wealth, property and investment.
Key implications include:
Rental profits and bank interest tax hike
Frozen thresholds
The chancellor announced a freeze in the personal allowance, higher-rate tax threshold and personal allowance abatement threshold until the 2030/31 tax year. Together with freezes on other thresholds such as VAT registration, the capital gains tax annual exemption and the inheritance tax nil-rate band, the freeze is an effective tax rise. People’s income and wealth rise with inflation, but if the thresholds remain fixed, more people are drawn into the tax system over time. This is a process known as fiscal drag.
New mansion tax
A new levy will be charged on properties with a value of over £2 million starting from April 2028. The surcharge has valuation bands: starting at £2,500 per year for homes worth £2–2.5 million, rising to £7,500 per year for homes worth over £5 million. For property transactions or disposals, see our section on Property Stamp Taxes.
Dividend tax rise
Starting April 2026, both the basic rate and higher-rate tax on dividends will increase by 2 percentage points. There appear to be no changes to the additional rate of tax on dividends (which applies to total income over £125,000). This will affect both investors and owner-managed businesses and contractors operating as companies. Relevant background can be found in our income tax rates section.
Rental profits and bank interest tax hike
Commencing April 2027, the basic rate, higher rate and additional rate tax on property income and bank interest will increase by 2 percentage points. For landlords, our guidance on the Let Property Campaign and property-related tax rules may be relevant.
ISA threshold to lower
The ISA allowance, currently £20,000, will be cut to £12,000 for investors under 65 years old. The change will take effect from the 2027/28 tax year and will not affect the stocks and shares ISA or other ISA types. The overall ISA limit of £20,000 will therefore stay intact.
Curbs to salary sacrifice
Taking effect from April 2026, the national insurance relief for making workplace pension contributions will be heavily curtailed. Salary sacrifice is a scheme whereby a reduction in salary is compensated for by an increase in workplace pension contributions. Currently the schemes are effective because pension payments made direct from earnings reduce the amount that is subject to both tax and national insurance. See our detailed rates at National Insurance Contributions.
The amount of pension contribution that can be made via salary sacrifice while still attracting NI relief will be capped at £2,000 per annum. The cap applies to the combined value of both employee and employer contributions. Once the £2,000 threshold is crossed, both employee and employer NI will be charged on the value of the pension contribution. Since income tax is unaffected, any contributions over £2,000 will be just as tax-efficient in a SIPP as in a workplace scheme. Other pension contribution limits, such as the annual allowance and associated limits, remain unchanged. Relevant reference tables can be found under Pension Rates.
Mileage tax for electric cars
From April 2028, there will be a mileage-based tax for electric and hybrid vehicles, raising revenue as fuel duty declines. Background rates are available in our Mileage Allowance and Advisory Fuel Rates sections.
Other key changes
- Increase in basic and new state pension of 4.8% (in line with the triple lock). See State Pension.
- Increase in basic minimum wage. Relevant tables can be found at National Minimum Wage.
Summary
With approval ratings under pressure, the Government has concentrated tax increases on higher earners and those with greater accumulated wealth. Fiscal drag is the effective tax rise, but it is delivered quietly through frozen thresholds while inflation persists in the background. Threshold freezing attracts less attention than rate changes and allows the government to maintain the position that manifesto commitments on headline taxes remain intact.
Property is a slow-moving asset class, and any recurrent levy will take time to reveal its full effect. Households do not relocate quickly; family, commercial and social ties mask the early impact. The luxury sector may appear to absorb the charge at first, but as capital gradually seeps elsewhere, UK (and particularly London) competitiveness will erode. Over time this feeds through to weaker market confidence, downward pressure on sterling, and risks for employment in the wider economy.
