Budget 2026

The Chancellor, John Healey, has revealed his first Budget. This post sets out the key changes from a personal finances perspective.

Key Points

  • The planned cut to the Cash ISA allowance has been scrapped.
  • Tax on savings interest and rental income will rise by a further 2% from April 2027.
  • A new Pension Tax Allowance will stop pensioners on the full new State Pension being brought into tax.
  • Pensions will still be brought into Inheritance Tax from April 2027.

Pensions

Pension Tax Allowance

The full new State Pension is expected to rise by 3.9% to £250.70 a week (£13,036 a year) from April 2027. For the first time, this takes it above the £12,570 Personal Allowance, which remains frozen.

To stop pensioners being brought into paying tax, the government is introducing a new Pension Tax Allowance (“PTA“) from 6 April 2027 to 5 April 2030:

  • If you are over State Pension age and your total income from all sources is no more than the full new State Pension, you will not pay income tax. The PTA is worth £93.20 a year (20% of the £466 difference between the full new State Pension and the Personal Allowance) and will be applied automatically.
  • If your income is higher, the PTA is gradually withdrawn. The Budget document does not give the rate, but early reports suggest it reduces by £1 for every £3 of income above £13,036, so it disappears completely once income reaches about £13,316.

For example, Margaret receives the full new State Pension of £13,036 and £200 a year from a small private pension, so her total income is £13,236:

  • Tax before the PTA: (£13,236 − £12,570) × 20% = £133.20
  • Her PTA of £93.20 is reduced by £200 ÷ 3 = £66.67, leaving £26.53
  • Tax to pay: £133.20 − £26.53 = £106.67

Without the £200 private pension, Margaret would pay no tax at all. With it, she pays £106.67, so that £200 of extra income is effectively taxed at around 53%.

This high effective rate applies to income between roughly £13,036 and £13,316. The amounts are small, but if your income is close to this level, how and when you take any private pension income could make a difference.

Inheritance Tax on pensions

Nothing in the Budget changes the plan to include unused pension funds and most pension death benefits in your estate for Inheritance Tax (“IHT“) purposes for deaths on or after 6 April 2027.

Pensions left to a spouse or civil partner remain exempt, and death in service benefits are excluded. If your estate could be affected, now is a good time to review your pension nominations and wider estate plans.

Death benefits: the two-year rule

Currently, when someone dies before age 75, their beneficiaries can usually receive their pension free of income tax, but only if the money is paid out or set up as drawdown within two years of the pension provider being told about the death. Miss that deadline, and the benefits become taxable.

The Budget removes this two-year rule for payments made from 28 October 2026, so delays by providers or in sorting out an estate will no longer turn a tax-free benefit into a taxable one.

Savings and Investments

ISAs

Last year’s Budget announced that, from April 2027, under-65s would only be able to put £12,000 a year into a Cash Individual Savings Account (“ISA“). That cut has now been scrapped, so you can still pay up to £20,000 a year into a Cash ISA, within the overall ISA allowance of £20,000.

The cut was due to come with new rules to stop people getting around it, including a ban on under-65s transferring money from a Stocks & Shares ISA to a Cash ISA, and a 22% charge on interest earned on cash held within a Stocks & Shares ISA. The official Budget document does not mention these rules, but the government has since confirmed they will not go ahead, as reported by Martin Lewis and MoneySavingExpert.

This means transfers between all types of ISA remain allowed, and transferring savings built up in previous years doesn’t use up your allowance for the current year.

The government will also work with the investment industry on a new incentive for people opening a Stocks & Shares ISA for the first time, with details to follow.

Tax on savings interest

Last year’s Budget announced a 2% increase in the rates of tax on savings interest from April 2027. This Budget adds a further 2% from the same date, so from 6 April 2027 the rates will be 4% higher than today:

  • Basic rate: 20% rising to 24%
  • Higher rate: 40% rising to 44%
  • Additional rate: 45% rising to 49%

The Personal Savings Allowance still lets basic rate taxpayers receive £1,000 of interest a year tax-free, and higher rate taxpayers £500.

For example, a higher rate taxpayer with £50,000 in a savings account paying 4% receives £2,000 of interest a year. After the £500 allowance, £1,500 is taxed, so their tax bill rises from £600 to £660 a year. Held in a Cash ISA, the same interest would be tax-free.

Dividends

There is no further change to dividend tax. The 2% increase announced in last year’s Budget took effect on 6 April 2026, so the rates are now 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate).

Income Tax Bands

As we covered in our Budget 2025 post, income tax bands are frozen until at least April 2031. There was no change to this, apart from the new PTA described above. The thresholds (for most people) remain:

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

Property

Rental income

Tax on rental income is also rising by a further 2% from 6 April 2027, on top of last year’s 2% increase. The new rates apply in England, Wales and Northern Ireland:

  • Basic rate: 20% rising to 24%
  • Higher rate: 40% rising to 44%
  • Additional rate: 45% rising to 49%

For example, a higher rate taxpayer with £10,000 of rental profit will pay £4,400 in tax instead of £4,000.

Other

  • A £100 Household Energy Payment for homes in council tax bands A to D in England, paid through local councils from January 2027.
  • 0% VAT on domestic electricity and the 5p fuel duty cut both extended to 1 July 2027.
  • The State Pension will rise by 3.9% next April. The Triple Lock continues until April 2029, then will be adjusted from April 2030.
  • A new government equity loan scheme for first-time buyers, and a lower 20% withdrawal charge for Lifetime ISA holders buying above the £450,000 price cap.
  • A 6% cap on Plan 2 and Plan 3 student loan interest until 31 August 2027.
  • Tax-free mileage rates increased to 55p for the first 10,000 business miles, and the Trading Allowance for side income increased from £1,000 to £3,000.
  • The Business Asset Disposal Relief lifetime limit will be halved to £500,000 from April 2027.

Tax rules can change and depend on your circumstances. This post does not provide advice. If you wish to receive advice, please book a meeting with one of our advisers.

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