After months of speculation and uncertainty, the Chancellor Rachel Reeves has unveiled her first Budget, with Capital Gains Tax, Inheritance Tax and employers’ National Insurance Contributions all in the firing line.
Perhaps the biggest surprise however, and the Chancellor’s “rabbit out of the hat”, was that an extension to frozen income tax thresholds was ruled out, so that from 2028-29 they will start being uprated in line with inflation again.
Here, we explain the main measures announced in the Budget to tackle the now infamous £22 billion black hole in public finances, and the impact they are likely to have on your finances.
Pensions
Defined contribution pensions to fall into inheritance tax net
Although pension tax relief and tax-free cash escaped reform in this year’s Budget, the Chancellor has changed the tax treatment of defined contribution pensions on death. This means from 2027 pensions will no longer be able to be passed on free of inheritance tax.
Gary Smith, Financial Planning Partner and retirement specialist at wealth management firm Evelyn Partners, said: ‘“Pensions have been one of the most tax-efficient investments available to savers, with tax relief on personal contributions, tax-free growth and pension funds remaining outside of your estate for IHT on death. That means some retirees have prioritised using other savings and assets to fund retirement before their pensions.
“Retirees and savers have 18 months to review their long-term plans. As defined contribution pension funds could now be subject to up to 40% IHT on death, we will probably see greater withdrawals from pension pots. Pension withdrawals are subject to income tax, so some savers in drawdown will have an eye on the frozen £50,270 threshold at which point their overall income from all sources will be taxed at 40%.”
You can find out more about how pension withdrawals are taxed in our article How much tax will I pay on pension withdrawals? and about current rules surrounding pensions and Inheritance Tax in our guide Can my pension be used to reduce inheritance tax?
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
State Pension
The Chancellor confirmed that the State Pension will increase by 4.1% in the 2025/26 tax year, in line with the government’s triple lock guarantee. This links the annual rise in the State Pension either to earnings numbers for May-July, September’s Consumer Prices Index (CPI) measure of inflation, or a minimum 2.5%, whichever is the highest. The earnings growth figure was announced as 4.1%, putting it well above 2.5% and CPI inflation at 1.7%l, which is why the State Pension will increase by this amount. Find out more about the pension triple lock and how it works.
This means that the new full State Pension will rise from £221.20 a week to £230.30 a week in the 2025/26 tax year, representing an annual increase of £473, although the amount you’ll personally receive will be based on your National Insurance Contribution record.
The full basic State Pension is currently £169.50 a week, and this will increase to £176.45 at the start of the new tax year on April 6, adding £361 onto annual payments. Learn more in our article What will the State Pension be in 2025?
Tax and National Insurance
Income tax
Despite widespread speculation that the Chancellor would extend frozen income tax thresholds to 2030, no such changes were announced.
Sarah Coles, head of personal finance, Hargreaves Lansdown said: “Rachel Reeves has quashed one of the biggest fears people had about the Budget, by announcing there will be no additional freeze in the income tax thresholds. It means from 2028/29 they’ll be uprated with inflation. It will bring an end to the rapid escalation of people paying more tax at higher rates. Of course, we still have to get through several years of a freeze, but there’s some hope now the end is in sight.”
When tax allowances are frozen, this means that over time most people will end up paying more tax due to what is known as ‘fiscal drag’. Fiscal drag is the process by which people end up paying more tax when tax rates and thresholds are left unchanged, as they earn more and their assets rise in value.
The current income tax thresholds are £12,570 (basic rate), £50,270 (higher rate), and £125,140 (additional rate).
The previous Prime Minister Rishi Sunak previously froze income tax thresholds until April 2026 when he was Chancellor, and former Chancellor Jeremy Hunt last year extended this for another two years – taking it to April 2028, and raking in around £4bn a year for the Treasury.
According to analysis by Hargreaves Lansdown, by 2028, these freezes mean there will be 3.7 million more taxpayers, 2.7 million more higher-rate taxpayers, and 600,000 more additional-rate taxpayers compared to if allowances and thresholds had been indexed to inflation and the additional rate threshold kept at £150,000.
Capital Gains Tax increased
“Invest invest invest” was the Chancellor’s mantra in this year’s Autumn Budget, but those who have diligently done so over the years might be wondering why they bothered after new higher Capital Gains Tax rates were announced.
The government is raising Capital Gains Tax rates from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher rate taxpayers, so that these will now align with the CGT rates payable on residential property.
Görkem Barron at Lubbock Fine Wealth Management, the wealth management arm of Lubbock Fine, chartered accountants and business advisers: “Even though a rise in CGT was widely flagged – an eight-point increase for basic rate taxpayers is far higher than most expected. It’s also very surprising that the CGT rise isn’t shared across asset classes – with CGT on property sales unchanged. This will be welcome news for Buy to Let landlords who were braced for an increase.”
“Such a large increase in CGT will impact private investors – it disincentivises investment in shares. There’s a real danger that this will erode share ownership culture in the UK.”
CGT is applied to any profit you make from selling or disposing of an asset which is above your yearly CGT allowance, known as the Annual Exempt Amount. This Annual Exempt Amount was halved from £6,000 to £3,000 in April 2024.
According to analysis by Bowmore Wealth Group, those aged between 55 and 64 are the age group with the largest number of CGT payers, with 98,000 tax payers in this age bracket paying more than £4.75bn in CGT in the past year.
Sarah Coles, head of personal finance, Hargreaves Lansdown said: “The change is a blow for investors. This could have been worse, with suggestions of a doubling of the rate, but it’s scant consolation for anyone hit with a bigger tax bill.
“This doesn’t just affect those who are hit with a far bigger bill, it also makes investment less attractive for newcomers who don’t want to have to get to grips with a new tax risk. Already far fewer people in the UK invest than elsewhere in the world, and this could compound the problem. For existing investors, there’s a danger this will drive investor behaviour, and people will focus on tax considerations, rather than the investments that make the most sense for their circumstances. There’s also a danger they may hoard the assets – possibly until their death.
“If capital gains tax is on your radar now, bear in mind that by investing through a stocks and shares ISA, you can avoid capital gains tax completely. Money paid into a pension will also grow free of CGT – plus you get tax relief on contributions into the bargain.”
National Insurance
Although there will be no increase in employee National Insurance Contributions, the government is raising the Contribution rate for employers by 1.2 percentage points, and also lowering the threshold at which employers must start paying the tax.
Employers currently pay NI at 13.8% on a worker’s earnings above £9,100 a year or £175 a week, but this will increase to 15% from April next year, whilst the £9,100 threshold will be cut to £5,000. Small businesses will be partially protected by increased allowances. Employers with NIC bills of £100,000 or less currently receive an allowance on the first £5,000, which will rise to £10,000.
Toby Tallon, tax partner at professional services group Evelyn Partners, said: “The increased NIC costs for employers will make employing workers more expensive and could put off some business owners from taking on additional staff. Stalling job creation could have a detrimental impact on UK economic growth which would be extremely worrying.
“There is an added credibility cost given many have suggested that increasing employer NIC is the breach of a manifesto pledge. Going back on your word to come up with a better plan is a sign of strength, but only if you own it and are convinced that it is a one-off. The Chancellor’s announcement that the national living wage will go up to £12.21 from April – a 6.7% increase and above inflation – adds further pressure on those businesses who have been facing higher costs and a slowdown in consumer demand in recent years.”
Inheritance tax
The current £325,000 Inheritance tax threshold has been frozen for another two years, to 2030.
If you’re concerned about the impact of this change, you may want to consider making the most of current gifting allowances, which haven’t been altered. For example, you can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. If you don’t use this annual exemption one year, you can carry it forward to the next tax year.
As well as your £3,000 annual exemption, you can give as many £250 gifts per person as you want during the tax year, provided you haven’t used another exemption on the same person.Learn more in our article Six ways to reduce inheritance tax bills.
As mentioned above, April 2027 will see inherited pensions brought into the IHT net. However, Tom Selby, Director of Public Policy at AJ Bell, said: “A major obstacle centres around how to treat people who have made decisions about their retirement pot based on the pensions death tax rules as they are today. There will, for example, be people who chose to transfer defined benefit pensions into a defined contribution scheme in part because they wanted to prioritise passing money on tax efficiently to loved ones. Anyone who made larger contributions into their defined contribution pension to make the most of the existing rules will also now be wondering what could happen to their pot when they die.
“If all of a sudden that money became subject to a new pensions death tax, those people would, understandably, feel like the rug had been pulled from under them. Needless to say, however this change is implemented, pension savers will be facing some complex decisions in the next few years, highlighting the importance of regulated financial advice for anyone factoring pensions into their estate planning.”
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
The government announced that Agricultural Property Relief and Business Property Relief on IHT will be reformed from April 2026 with assets above £1million attracting 50% relief. This will also apply to qualifying Alternative Investment Market (AIM) shares. At the moment, if you hold qualifying AIM investments for two years, they fall out of your estate for inheritance tax purposes.
Toby Tallon, tax partner at professional services group Evelyn Partners said: “The introduction of restrictions to IHT business reliefs will make it more costly to pass family firms on to the next generation. This could put the viability of many long-standing companies – and the ability to continue employing loyal workforces and growth in local communities – at risk, particularly if family members of business owners have sizeable IHT bills they need to settle.
“Businesses plan for many variables and risks, but the trickiest and most painful one is the death of the owner manager. On top of the personal loss for the family, the last thing that the employees, suppliers and local community want is for the business to be sold in order to pay inheritance tax. However, following the Chancellor’s announcement many families will now be left in the difficult position of considering whether businesses should continue trading.”
VAT on school fees to go ahead
The Chancellor confirmed that Labour remains committed to introducing VAT on private school fees from January next year. Reeves has promised an additional £6.7bn to the Department for Education next year, including funds to rebuild schools where needed.
National Living Wage up
The National Living Wage will increase by 6.7% to £12.21 an hour from April next year, adding £1,400 a year to the paypacket of a full-time worker. Those aged 18-20 will see their National Minimum Wage increase by £1.40 an hour up to £10 an hour, an increase of 16.3%.
Kate Smith, head of pensions at Aegon, said: “In percentage terms, the increase is more than half again the most recent increases in national average earnings of 4.1%, which is the increase state pensioners are in line for next April under the triple lock. It’s also almost 4 times the September inflation rate (CPI) of 1.7% used to increase most other benefits.
“A hidden benefit is that the increase in the National Living Wage will also have a positive impact on pension contributions, enabling employees to build up larger pension pots. An increase to £12.21 an hour (£22,222 pa based on a 35 hour working week) means employees on the National Living Wage who are auto-enrolled into a workplace pension will benefit from a total annual pension contribution of £1,278 a year, made up of their own and their employer’s pension contributions, meaning an additional £112 going into their pension over the course of a year.”
However, the new minimum living wage is still less than the real Living Wage (a voluntary hourly rate of pay that is higher than the minimum wage and is based on the cost of living) which many employers have signed up to. This currently stands at £13.85 an hour in London and £12.60 an hour for the rest of the UK.
Individual Savings Account allowance to remain at £20,000
The government has confirmed current ISA allowances will remain in place until 2030. An ISA is essentially a tax-efficient wrapper that you can hold savings or investments in, so your returns are shielded from the taxman.
The ISA limit for the current 2024/25 tax year stands at £20,000. You get a new ISA allowance at the beginning of each new tax year starting on April 6, and it’s a case of use it or lose it. Any part of your allowance you haven’t used by the end of the tax year cannot get carried over into the next tax year.
Kevin Brown, savings specialist at Scottish Friendly, said: “Using tax-efficient wrappers such as Individual Savings Accounts (ISAs) and Junior ISAs (JISAs), and as much of your annual allowance as you can afford each year, is, after pensions, an accessible way to make the most of savings for the majority of UK households.
“Alongside pension wrappers, ISAs and JISAs shield your investments from capital gains tax (CGT). So, with the changes announced to CGT by the Chancellor today, where CGT on shares is set to increase from 10% to 18% at the lower rate and from 20% to 24% at the higher rate, stocks and shares ISAs and JISAs just became a whole lot more attractive.”
Benefits
Pension Credit
The Pension Credit Standard Minimum Guarantee, like the State Pension, will increase in line with the triple lock guarantee by 4.1% from April 2025, meaning an annual increase of £465 in 2025-26 in the single pensioner guarantee and £710 in the couple guarantee.
Find out more about Pension Credit and eligibility requirements in our guide Pension Credit explained. If you think you might be eligible to claim it, you can make a claim by phone using the Pension Credit claim line on 0800 99 1234. If you’d rather make a paper application, you can request one on the above number, or you can download and print a Pension Claim form here.
Carer’s Allowance
The Chancellor is raising the amount people can earn before they are no longer eligible for Carer’s Allowance from £151 to £181 a week from April next year., equivalent to 16 hours on the National Living Wage. Carer’s Allowance is the main state benefit available to carers and in the 2024/25 tax year it is £81.90 a week. This change should mean that 60,000 more carers will be eligible for Carer’s Allowance.
Helen Walker, chief executive of Carers UK, said: “It’s been heartbreaking and frustrating to hear carers having to choose between paid work and Carer’s Allowance simply because of a rise in the National Living Wage – something that is supposed to benefit low paid workers, not put them out of work. We’re delighted that this is being addressed.”
You may be able to claim Carer’s Allowance if you look after someone for more than 35 hours each week and the person you’re caring for gets certain benefits, such as the Personal Independence Payment, Disability Living Allowance or Attendance Allowance.
To qualify, you’ll need to meet the above points and earn £151 or less a week (rising to £181 a week from April) after tax, National Insurance and expenses. Learn more about benefits for carers in our guide Carers: don’t miss out on benefits help.
Winter Fuel Payments now means-tested
We knew prior to the Budget that the Winter Fuel Payment was to be removed from millions of pensioners, so that now only those claiming Pension Credit or other means-tested benefits will qualify this winter.
If you’re on a low income, it’s vital to check whether you’re eligible for Pension Credit as soon as possible as it could not only provide you with valuable retirement income and the Winter Fuel Payment, but also a range of other benefits, such as help with housing costs, council tax and NHS dental care. Learn more in our articles Pension Credit explained and Winter Fuel Payment 2024: who is eligible, and how can I claim?
Household Support Fund extended
The Household Support Fund, which allows councils to help families experiencing financial hardship via foodbanks, warm spaces and food vouchers, will now run until the end of March 2025, and has been given a £421m extension.
The fund is available in addition to other support schemes that help people heat their homes during winter such as the Warm Home Discount, Cold Weather Payment and the Winter Fuel Payment, although the latter has recently been restricted to only pensions claiming means-tested benefits.
Find out more in our article The Household Support Fund explained.
Working age means-tested benefits
Working age means-tested benefits, including Universal Credit, will rise in line with September’s inflation figure of 1.7% from next April, the Chancellor confirmed.
There will also be greater protections introduced for Universal Credit claimants, with the amount that can be deducted from benefit payments to repay short-term loans and debts capped.
Find out more about Universal Credit and whether you might be eligible to claim it in our guide Everything you need to know about Universal Credit.
Property and housing
Social housing boost
An additional £500m to be given to the government’s affordable homes programme in a boost to social housing.
Housing associations will be allowed to set rents for five years, giving them greater financial stability so they can invest more in extra housing. Rents will be permitted to rise by the consumer price index level of inflation plus 1% each year.
Stamp Duty
The current 3% stamp duty surcharge which applies to second homes will increase to 5% with immediate effect.
Ms Coles of Hargreaves Lansdown said: “The rise in the stamp duty surcharge will mean a bigger tax bill when landlords get into property. The ongoing freeze in income tax thresholds and less generous mortgage tax relief means they pay more tax on rent as they go along. Then when they come to sell up, there’s Capital Gains Tax to pay.
“Unlike investors in stocks and shares, property investors can’t protect themselves from this tax by using ISAs. They can’t realise capital gains gradually either and take advantage of their annual allowances. It means landlords may well be taking a closer look at their portfolio today, and wondering whether all this tax means the sums no longer add up.”
There were no changes announced to the end of the current stamp duty holiday for first-time buyers next year. Current rules mean there’s no duty for them to pay on the first £425,000 of a property’s value. This applies to all homes worth up to £625,000.
Transport
Bus fares to increase
England’s bus fare cap will rise from £2 to £3 in 2025, the Prime Minister Keir Starmer confirmed prior to the Budget, and will be capped at this level until the end of 2025.
Fuel duty frozen again
The Chancellor froze fuel duty for the fourteenth consecutive year. Had she reversed this, then once VAT is added on at the pump, motorists would have faced paying an extra 7p a litre on the price of fuel.
Air Passenger Duty
Holidaymakers across the UK will face steeper travel costs, with the Chancellor announcing an increase in Air Passenger Duty (APD). APD is a tax levied by HMRC on passengers flying from a UK airport, with different rates applied depending on the flight’s distance and travel class.
The rate of air passenger duty for private jets will increase by 50% – equivalent to £450 per passenger for a private jet heading to California, Ms Reeves joked, indirectly referring to Rishi Sunak and his use of this mode of transport.
Andy Wood, a tax expert from Tax Natives said: “Any additional increase in APD will directly affect flight prices, making holidays more expensive for UK travellers,” the expert warned. “Even a seemingly small increase of a few pounds can have a large impact, particularly for families booking multiple tickets or those opting for long-haul destinations. When you multiply the increase by several passengers, the extra cost becomes significant.”
Alcohol and tobacco
There was good news for beer drinkers in the Budget, who will see draught duty reduced by 1.7%, meaning a penny off a pint in the pub. However, the news is less positive for those who enjoy other types of tipple. The Chancellor will be increasing rates on non-draught drinks in line with RPI figure for September this year – which was 2.7% – from February 1, 2025.
The price of a packet of cigarettes will increase by RPI (retail price inflation) plus an extra 2%, with duty on rolling tobacco is set to increase by 10 per cent in the coming year.
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