How will the Budget impact your personal finances?
It’s the day after Rachel Reeves’ crunch Budget, and while the Office of Budget Responsibility leak may be the main talking point, after months of speculation we finally know how personal finances will be impacted.
As expected, Reeves extended income tax freezes and introduced a range of smaller taxes, in moves that are expected to raise £26bn in extra government revenue by the end of this parliament, which she used to increase welfare spending, by lifting child benefit payments, as well as to increase her fiscal buffer.
The consequences and outcomes of the decisions from the Treasury will become clearer over the next few weeks, but for now here’s how the Budget will affect investments and personal finances.
Blick Rothenberg has also put together a tax calculator to help you figure out how Rachel Reeves’ announcements will affect your finances.
Income tax
For months, both Reeves and Starmer have reiterated their commitment to their manifesto pledge of not hiking taxes for working people, but the Chancellor took the UK’s tax burden to an all-time high.
Reeves extended the income tax threshold until 2031 rather than 2028 as previously indicated.
Economists and political opponents hailed the move a manifesto break, due to the £8.3bn stealth tax dragging 920,000 more Brits into paying 40 per cent tax on their income.
Meanwhile, 780,000 more people will be paying into public coffers as the basic rate and if families with small children see their income creep over £100,000 the loss of 30 hours of free childcare adds an additional blow.
Property income tax and mansion tax
From April 2027, property income will be taxed in line with savings income and will affect landlords with income over £25,000 per year.
The rate will be increased by two percentage points for all tax bands, with basic rate payers paying a 22 per cent charge, while higher rate payers will pay 42 per cent.
Additional rate tax payers will be slapped with a 47 per cent charge and the tax is estimated to raise £0.5bn a year on average from the 2028 financial year.
The Chancellor also confirmed the rumoured ‘mansion tax’, with a new high value council tax charge surcharge for owners of properties valued over £2m.
There will be four price bands, with the surcharge rising from £2,500 for a property valued between £2m and £2.5m to £7,500 for a property valued above £5m.
The measure is estimated to raise £0.4bn in 2029-30, with revenue to flow to central government rather than remain with local government.
Inheritance tax and mansion tax
After high earners were forced to brace for changes to the inheritance tax (IHT) framework in last year’s Budget, where pension pots were subjected to IHT from April 2027, estate planning has been spared major moves this year.
But, the inheritance tax threshold will remain frozen at £325,000 until 2031, a year longer than expected, pulling more estates into the tax net as asset value rises.
Capital gains tax (CGT) rates also remain unchanged after having risen in last year’s Budget, with the annual £3,000 tax exemption also staying the same.
The one thing to note is the 100 per cent CGT relief on sales of business into an Employee Ownership Trust is to be cut to 50 per cent, which could impact some retiring business owners.
Pensions and salary sacrifice
Pensions were subject to mass speculation in recent weeks, with advisers working overtime to try and stop savers from withdrawing their lump sum before the Budget.
Much to pensioners relief the 25 per cent tax free lump was left untouched, but to the chagrin of employees and employers the Treasury ripped up the salary sacrifice regime.
It allows employees to give up a portion of their salary for other benefits, such as childcare vouchers and electric vehicle grants, reducing total income and tax bills by dragging them back under the £100,000 threshold.
The most popular scheme is pension contributions, where employees effectively take a pay cut in exchange for higher pension contributions, pushing them back under the threshold.
But in a major shake-up to the pensions system, salary sacrifice schemes have been pared back by Reeves, with the exemption capped at £2,000 per employee, per year, from April 2029, arguing that the scheme does not benefit those on the minimum wage.
This means any further pension contributions over this amount will be subject to standard national insurance rates of eight per cent on salaries under £50,270 and two per cent on any income above that.
Cash ISA slash
The feud between brokers and building societies has come to an end, as the cash ISA tax-free ceiling was slashed from £20,000 to £12,000.
This means any savings over £12,000 will be subjected to tax as of April 2027, as part of the Chancellor’s bid to stop Brits from hoarding cash.
However, pensioners will dodge the cut retaining the full allowance, allowing them to accumulate lower-risk savings upon entering retirement, through moving capital back into cash ISAs from stocks.
Dividends
Sticking with Reeves’ stock market push, dividends are also set for a tax hike from April 2026, with a two percentage point increase inflicted on both basic rate and higher rate tax payers.
Basic rate taxpayers, who earn between £12,571 and £50,270 will now be charged 10.75 per cent up from 8.75 per cent.
Higher rate tax payers, who earn between £50,271 and £125,140 will be slapped with a 37.75 per cent charge up from 33.75 per cent.
Meanwhile, additional rate taxpayers will continue to shoulder a 39.35 per cent.
The hike will hit investors who hold shares outside of tax-free wrappers, so consider moving funds into accounts such as pensions or a stocks and shares ISA.
Dividends in pensions can accumulate without being subjected to either dividend or capital gains tax and do not take up any of the £500 allowance making them a suitable option, however investors are unable to access the funds until they reach 55 in most instances.
Dividends in stocks and shares accounts are shielded from income tax up to £20,000, while also being free from the dividend allowance.
Stamp duty holiday
In a bright spot for investors, a stamp duty holiday for new listings on the London Stock Exchange was unveiled.
The decision will wipe out the 0.5 per cent stamp duty tax investors are forced to pay upon buying new listings with immediate effect for three years, in a bid to get investors back into the flailing stock market.
It’s a small shot in the arm for the city, but it’s one less tax for Brits to contend with.
Lifetime ISA
The Lifetime ISA found itself locked out of the Budget speech, as all the noise centred on cash ISAs, but a potential change to the controversial scheme was discovered buried away in the Treasury’s Budget document.
The ISA will maintain its £4,000 per year tax free ceiling, but the government will publish a consultation in early 2026 on the implementation of a new simpler ISA product to support first time buyers.
Once the product is available, it will be offered in place of the Lifetime ISA.
There was no confirmation on whether the account’s £450,000 property price cap could be lifted for existing LISA holders, but online speculation hints that the government will look into lifting it as part of its consultation.
London buyers may be able to benefit from a product after all.