Budget Analysis – 2025

Financial Planning

1 Dec

Introduction

Irrespective of the policies laid out by the Chancellor, the Budget last week must go down as one of the most shambolic in recent history.

Even before the Chancellor was invited to speak, the Deputy Speaker, Nusrat Ghani, rebuked the government for months of speculation, leaks and media briefings by the Treasury.

It also transpired that the Office for Budget Responsibility published details of the Budget proposals around 40 minutes too early!

I generally remain cautious around Budget speculation, especially when it comes to pension rules and possible tax rises, preferring to focus more on clients’ financial planning needs and goals rather than making knee-jerk reactions as to what might or might not appear in the Budget.

Hopefully, going forward, there will be less speculation leading up to a Budget which will enable us to focus much more on longer-term financial planning.

After all the speculation, let’s look at some of the measures that were announced and how this could impact your financial planning.

Freezing Income Tax Thresholds

The government announced that it will extend the freeze on the income tax thresholds from April 2028 to April 2031 and the Personal Allowance will also be frozen until April 2031. This is a stealth tax writ large.

The key issue here is managing income that comes close to or crosses an income tax threshold. This is where pension contributions or gifts to charity may play a role and, where possible, ensuring that both spouses are using all available reliefs and allowances.

Savings and Dividend Taxes

From April 2026, the Dividend tax rate will increase by 2% for basic rate and higher rate taxpayers. This means an increase from 8.75% to 10.75% for basic rate tax payers and an increase from 33.75% to 35.75% for higher rate tax payers. There will be no increase for additional rate tax payers with the rate remaining at 39.35%.

The dividend tax nil rate remains at £500.

For savers, from April 2027, there will be an increase of tax of 2% on savings income across all tax bands meaning that savings income will be taxed at 22%, 42% and 47% respectively.

The starting rate for savings will remain at the current level of £5,000 and the Personal Savings Allowance will be kept at £1,000 for basic rate tax payers and £500 for higher rate tax payers.

Dividends still remain attractive for basic rate and higher rate tax payers compared to income tax but the nil rate limit has been slashed over recent years.

Again, using all available reliefs and tax free allowances is going to be crucial going forward.

Cash ISA Allowance

The overall ISA allowance will remain at £20,000 until April 2030.

However, from April 2027, the amount that can be placed into a Cash ISA for those under the age of 65, will be reduced to £12,000.

Holding cash tax efficiently is going to be more of a challenge particularly for those under the age of 65 although National Savings Premium Bonds and individual Gilts may offer more tax efficient alternatives.

Property Income

From April 2027, property income will have its own tax rates and these will be 22% (basic rate), 42% (higher rate) and 47% (additional rate).

Property has been hit by all sorts of tax increases over recent years which has lessened the appeal of holding Buy-to-let property. Where these are held, it might make sense to transfer full or part ownership to a lower tax paying spouse.

High Value Council Tax Surcharge (HVCTS)

This is due to come into force from April 2028 in England and will be levied on properties worth £2m or more (valued as at 2026). There will be a consultation as to whether any reliefs or exemptions should apply. The bands will be:

£2.0m - £2.5m £2,500

£2.5m - £3.5m £3,500

£3.5m - £5.0m £5,000

£5m + £7,500

It will be interesting to see what impact this has on the property market and, in particular, valuations.

A key question is whether this measure is simply a marker for future Council Tax changes and whether there will be a surcharge on £1m properties in the future.

Pensions

The good news is that the basic and new state pension will be increasing by 4.8% from April 2026.

The bad news is that the government has announced that from April 2029, the maximum contribution paid under a salary sacrifice arrangement will be capped at £2,000.

Any contribution over and above this amount will be treated as a normal personal contribution and the earnings on which the contribution is based, will be subject to National Insurance Contributions.

It is important to remember that pensions will still remain a very tax efficient way to save for retirement and the changes to salary sacrifice shouldn’t deter people from making pension contributions.

Having said that, the government should be doing all it can to encourage people to save for their retirement and so this measure does seem a little counter intuitive. The fact that the measures aren’t coming in until April 2029, an election year, does give us some time to plan ahead and gives the government perhaps some time to reconsider!

It seems that pensions (other than salary sacrifice) have been largely untouched this time round although the government will be moving ahead with bringing pensions into the realm of Inheritance Tax from April 2027.

This makes financial planning especially important as typically pensions are an individual’s most valuable asset after property. For clients taking an income from their SIPPs, we are looking at ways any surplus income could be gifted to future generations.

Inheritance Tax

The Inheritance Tax Nil Rate threshold of £325,000 will now be frozen until April 2031.

We know from the previous Budget that the Residence Nil Rate Band will be kept at £175,000 until April 2030 as well as the Residence Nil Rate Band tapering on estates valued at more than £2m.

The freezing of the nil rate bands and the introduction of Inheritance Tax on pensions will mean more and more people will be impacted by Inheritance Tax. There is unlikely to a straight-forward fix and a bespoke estate planning strategy will be required to ensure that Inheritance Tax can be avoided and monies passed tax efficiently to future generations.

A welcome measure in terms of Inheritance Tax was the decision to allow the Business Property Relief (BPR) and Agricultural Property Relief (APR) allowances of £1m to be transferable between spouses with effect from April 2026.

This means that, on second death, potentially up to £2m of relief may be available.

This is welcome news for business owners and farmers although many may still feel disappointed with the reforms in the first place.

For small business owners, greater consideration must be given to either an exit strategy or succession plan.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS)

These are more esoteric investments aimed at both sophisticated and High Net Worth clients who are happy to put a small proportion of their overall wealth into start-up companies. The government wants to help both start-ups and early-stage companies for longer.

There were changes announced to the overall investment limits but perhaps the biggest change is that VCTs will no longer qualify for 30% income tax relief but, from April 2026, this will be reduced to 20% income tax relief.

There is no change to the income tax relief for EIS investments and this remains at 30%.

Electric Cars

The government announced that from April 2028, they will be introducing an Electric Vehicle Excide Duty (eVED) where drivers of electric cars pay for their mileage at 3p per mile.

For those who drive electric cars, this is another expenditure item to add into the financial plan.

Conclusions

The theme of this year’s Budget is increased taxation and increased spending and it is difficult to see where increased productivity and economic growth are likely to come from.

With thresholds frozen and taxes likely to rise still further over the course of this parliament, more than ever, there is a need for bespoke financial planning so that clients’ goals and objectives can be met whilst still navigating the changing tax landscape.

As always, if you have any questions please do get in touch.