We have previously cautioned against reacting to media speculation regarding potential changes to the tax-free lump sum in the forthcoming Budget. Once again, the forecasting proved incorrect and the Chancellor chose to boost Treasury reserves elsewhere.
Figures show that last year, over 25,000 people accessed pension pots worth £250,000 or more in the six months before the 2024 Budget – more than 50 per cent on the same period a year earlier. However, neither the tax-free lump sum nor pension tax relief were changed in either year’s announcement.
Instead, Rachel Reeves declared an income tax threshold freeze and finally revealed a ‘Mansion Tax’ in a Budget which started in chaotic fashion. After the Office for Budget Responsibility (OBR) accidentally released the entire fiscal statement earlier than planner, the markets reacted accordingly. By the end of the day, the market volatility had eased considerably.
The freeze on income tax thresholds will last until 2031, meaning more taxpayers will be subject to higher income tax rates due to ‘fiscal drag’.
In more bad news for those running private practices, the tax on dividends will be increased from April 2026 by 2 per cent bringing the basic rate from 8.75 to 10.75 per cent and the higher rate from 33.75 to 35.75 per cent. The additional rate remains unchanged at 39.35 per cent. This is on top of the increases in corporation tax in recent years.
One prediction which did come true was a change to ISAs. The total ISA allowance remains at £20,000 per tax year but from April 2027, the cash ISA limit will be cut to £12,000 for the under 65s.
The Chancellor said the UK has some of the lowest levels of investment. “Someone who had invested £1,000 a year in a stocks-and-shares ISA since 1999 would be £50,000 better off today than if they had put the same into a cash ISA.”
Figures show that cash ISA savers benefitted from £2.1bn of tax-free interest in 2023/24, up from £70mn in 2021/22 which made them a likely target for a Chancellor looking to raise funds.
There will also be a 2 per cent increase to tax paid on savings income. From April 2027, the basic rate will rise from 20 to 22 per cent, the higher rate from 40 to 42 per cent, and the additional rate from 45 to 47 per cent.
From April 2029, there will be a cap of £2,000 on salary sacrifice pensions before National Insurance will apply – although this does not apply to NHS pensions. Contributions above this threshold will be subject to both employer and employee NICs.
There was much speculation about possible changes to the inheritance tax rules but instead, the IHT nil rate band and residential nil rate band will be frozen at current levels for another year until 6 April 2031. The nil rate band has not changed since 2009.
If you have any concerns about the impact of the Budget please speak with your adviser.
Approver Quilter Financial Services Ltd 04/12/2025
