Key Points

• Income tax bands will be frozen for longer.
• Salary sacrifice pension contributions will be limited.
• The income tax rates for interest, dividends, and rental income will rise in 2027.

Pensions

Salary sacrifice/exchange

Salary sacrifice is a popular and tax-efficient way in which private sector employers can fund their employees’ pension plans.

An employee agrees to give up part of their wages in exchange for an equivalent employer contribution to the employee’s pension plan.

Salary sacrifice gives both the employee and employer additional tax relief compared with other pension funding options. This is because neither party suffers National Insurance Contributions (“NICs“) on the pension contribution amount.

From April 2029, the following changes will be introduced:

• The first £2,000 of employer contributions are unaffected.
• Employees will pay 8% or 2% NICs on any excess (depending on their other income – higher earners will pay 2%).
• And employers will pay 15% NICs on any excess.

This change will be introduced despite page 24 of the 2024 Labour Party manifesto stating “Labour will not increase taxes on working people…“.

The government believes this measure will raise around £2 billion to £4 billion per year. The parties most affected will be:

• Companies employing those on high salaries, particularly professional service companies including engineers, solicitors, and accountants.
• People who run their own limited companies.
• Anyone with a salary over £40,000 who pays the minimum 5% auto enrolment contribution via salary sacrifice

Limited company directors

We often see directors putting off making annual pension contributions in favour of making a bigger one-off payment in a future tax year.

You should now consider contributing in advance of the 2029-30 tax year, before these rule changes take place.

Examples of this new tax charge at different salary levels are as follows:

Savings and Investments

ISAs

While the ISA subscription limit will remain at £20,000 per tax year, from April 2027, under-65s can only put up to £12,000 of this into a Cash ISA.

For example, an under-65 with £20,000 available could do:

• £0 into a Cash ISA; £20,000 into a Stocks & Shares ISA
• £5,000 into a Cash ISA; £15,000 into a Stocks & Shares ISA
• £12,000 into a Cash ISA; £8,000 into a Stock & Shares ISA

Under-65s who still wish to contribute £20,000 to a Cash ISA will (presumably) be able to carry out a transfer in a future tax year, negating this rule change.

It is hoped this will encourage younger savers to buy shares/investments rather than hoarding cash. Critics argue it further increases the complexity of ISAs.

Income Tax Bands

The previous Conservative government froze income tax bands in March 2021, and extended the freeze in 2024. As wages rise over time, this drags more and more people into paying higher rates of tax.

The thresholds (for most people) are:

• £0 to £12,570: 0%
• £12,570 to £50,270: 20%
• £50,270 to £125,140: 40%
• £125,140+: 45%

In her 2024 Budget, Reeves said she would maintain the Tories’ freeze until March 2028, but then it would be lifted from April 2028 onwards. At the time, Reeves said:

• continuing the freeze would “hurt working people” and “take more money out of their payslips.”
• unfreezing the allowances in April 2028 would “…protect working people from being dragged into higher tax brackets.”

In the 2025 Budget, Reeves unfortunately announced the income tax bands will be frozen for another three years. This means it will be at least April 2031 before the income tax bands will increase.

By way of context, if the allowances had been lifted in line with inflation since 2021, they would now be:

• £0 to £15,700: 0%
• £15,700 to £62,800: 20%
• £62,800 to £156,300: 40%
• £156,300+: 45%

That is after just four years of inflation – so you can guess the impact if we must wait another six years before seeing an increase.

Other

Electric Vehicles

As widely rumoured, a per-mile tax on electric vehicles (“EVs”) will be introduced – albeit, not until April 2028. This will be at a rate of 3p per mile for pure-EVs and 1.5p per mile for plug-in hybrids.

In many cases, this will be borne by companies who have provided their employees with tax-efficient EVs under the company car scheme.

This will be payable in addition to existing car taxes for EVs:

• around £195 per year for Vehicle Excise Duty
• plus, in many cases, the Expensive Car Supplement (or “Luxury Car Tax”) which applies to many EVs. This is £425 per year for years two through to six.

Mansion Tax

As rumoured, an additional council tax levy will be introduced for higher-value properties. It will be a minimum of £2,500 per year, with higher amounts for more expensive properties.

This will apply to those properties in the F, G, and H council tax bands, but only where the market value of the property is over £2 million.

Background

In the not-so-distant past, the annual Budget used to be a relatively low-key event – a little tweak in some rates or allowances and everyone moved on with their lives.

Last year’s Budget was significant because it was the first Labour Budget in 14 year. It came on the back of a manifesto promising growth and improvements in public services without increasing the main tax rates.

But then there was the issue of the controversial “black hole” in public finances, claimed to have been discovered only after Starmer and Reeves took office. This was the start of Labour’s issues with the public finances as they:

• immediately withdrew the Winter Fuel Allowance and announced public school fees would be liable to VAT
• talked down the economy, which had a marked and long-lasting impact on investment and consumer confidence
• went on to make significant changes to Inheritance Tax in the Budget, all of which were targeted at the private sector – bringing pension death benefits, businesses, and farmers into paying the unpopular death tax

Over the last year, the leadership has lurched from crisis to crisis, with Labour now fighting a war on both sides of the political spectrum – desperately keen to keep out Reform/Farage while equally concerned about the Greens and “Your Party”. It has announced major changes, fought back the initial conflict and stated its conviction, only to eventually U-turn.

All of this has created a rudderless government, without guiding principles, which has largely ignored its manifesto, and which is scared of making any changes.

The day before the Budget, Reeves stated it would be a “pick n mix” of policy changes, telling backbenchers they will “like 95% or 99%” of it and saying they must move on regarding the remainder.

Ultimately the 2025 Budget is Reeves’ attempt to keep everyone at bay – not just in terms of politics, but the currency and government debt traders too. Liz Truss and Donald Trump both felt the wrath of the financial markets in 2022 and 2025 (respectively), and Reeves is conscious that one wrong step will see her out of a job – no doubt with Starmer close behind.