2025 Budget: Key Tax Changes Explained

• Income tax and National Insurance thresholds will remain frozen until 2031, increasing the likelihood of taxpayers moving into higher bands.
• Property income, savings income and dividend income will attract higher tax rates from 2026 and 2027.
• A new limit on the national insurance advantages of salary sacrifice pension contributions will begin in 2029.
• Benefits in kind will be reported through PAYE in real time from 2027 as P11D forms are removed.
• HMRC will strengthen compliance activity and require VAT e invoices from 2029.

The government has confirmed that the freeze on personal income tax thresholds and the National Insurance contributions secondary threshold will be extended from 2028 until 2031. A freeze of this length increases the effective tax burden on many individuals because wages tend to rise over time. As earnings grow while thresholds remain fixed, more people move into higher tax bands. This is often described as a stealth tax because it raises revenue without altering headline tax rates.

The Plan 2 student loan repayment threshold will also be frozen from April 2027 until 2029 to 2030. Graduates with these loans will therefore begin making repayments sooner or at higher levels than they would if thresholds rose with inflation.

• More individuals are expected to become higher rate taxpayers over the coming years.
• Even modest pay increases may result in higher total tax paid.
• Graduates on Plan 2 loans will see earlier or larger repayments.
• The freeze interacts with other changes in this Budget, particularly the increases to dividend tax rates and the higher tax rates on savings and property income.

Property income will be taxed at higher rates from 6 April 2027. This affects landlords and individuals who receive rental income. The higher rates will reduce net rental returns, particularly when combined with fixed thresholds and other Budget changes.

Many landlords will experience increased tax liabilities even where rental income remains unchanged. In addition, the new ordering of reliefs and allowances (explained later in this article) may limit the ability to offset property profits using certain reliefs.

Savings income such as interest from bank accounts or fixed term deposits outside ISAs will also be subject to higher tax rates from 6 April 2027. This change is particularly relevant because many savings products currently offer higher interest rates than in previous years.

• Basic rate increases from 20 percent to 22 percent.
• Higher rate increases from 40 percent to 42 percent.
• Additional rate increases from 45 percent to 47 percent.

Although the Personal Savings Allowance remains unchanged, more individuals will fall into taxable territory due to higher interest returns and the effect of frozen thresholds.

Dividend tax rates will rise from 6 April 2026. These changes will affect anyone receiving dividends, including company directors who take part of their remuneration in the form of dividends.

The dividend allowance was reduced in last year’s budget, which means a greater share of dividend income is taxable. Combined with frozen thresholds, more dividend income is likely to fall into the higher and additional rate bands in the coming years.

A technical but significant change in the 2025 Budget concerns the ordering of certain reliefs and allowances. Those that are deductible at steps 2 and 3 of the income tax calculation will now only apply to property, savings and dividend income after they have already been applied to other types of income.

• Reliefs cannot be used as freely to reduce tax liabilities on these forms of income.
• Property and dividend income may attract higher effective tax.
• Individuals with multiple income sources may face unexpected increases in tax even if their reliefs remain unchanged.

This change takes effect alongside several of the rate increases outlined above.

A new limit will apply to the national insurance advantages of salary sacrifice pension contributions from April 2029. Under the new rule, the first 2,000 pounds of salary sacrificed into a pension each year will remain free of employer and employee NICs. Contributions above this amount can still be made through salary sacrifice but will be subject to NICs.

• The NIC exemption applies only to the first 2,000 pounds of sacrificed salary each year.
• Pension contributions above this level will continue to receive income tax relief but will not receive NIC relief.
• The government expects typical contribution levels to fall within the exempt threshold.
• Higher earners and directors making larger contributions will experience the greatest impact.

Benefits in kind will be reported in real time through PAYE from 6 April 2027. P11D forms will be abolished. Employers will need to ensure that payroll systems can process benefits throughout the year and that valuations are accurate at the time of reporting.

• All taxable benefits will be processed via RTI.
• P11D and P11D(b) submissions will no longer be required.
• Employees will see the tax on benefits reflected directly in their pay.
• Employers must maintain accurate and timely reporting practices.

From 1 April 2026, the government will double the penalty for submitting a late Corporation Tax return. This forms part of wider efforts to improve compliance and reduce outstanding tax debts.

Businesses that regularly file close to the deadline or file late should be aware of the increased costs associated with delayed submissions.

The government has announced a new High Value Council Tax Surcharge for homes valued at more than 2 million pounds. This measure will apply from April 2028 and is expected to raise significant revenue from high value properties.

Valuations will use 2026 reference values. Owners of properties in affected areas, particularly London and the South East, are likely to see notable increases in their annual council tax liabilities.

A new per mile charge for electric vehicles will apply from 2028. This measure is intended to reflect the reduced fuel duty revenue from the transition away from petrol and diesel vehicles.

• Fully electric vehicles will be taxed at 3 pence per mile.
• Plug in hybrid vehicles will be taxed at 1.5 pence per mile.

Drivers will estimate mileage at the time of vehicle tax renewal and later confirm this through odometer readings. Electric vehicles will still benefit from lower running costs, but the new per mile charge introduces an additional cost for EV ownership.

The Budget 2025 contains several measures relating to savings incentives and tax advantaged accounts.

• The Help to Save scheme will become permanent.
• The overall ISA annual contribution limit remains at 20,000 pounds.
• From April 2027, the cash ISA limit for individuals under 65 will be reduced to 12,000 pounds.
• The remainder of the ISA allowance can still be used across other ISA products.

These changes are particularly relevant for individuals who save significant amounts in cash ISAs or who plan to diversify their savings strategies before the new limits apply.

The government intends to strengthen HMRC’s compliance activity through additional investment and new administrative measures. This includes more active debt collection, increased use of data and a greater focus on on time filing and payment.

• Additional funding for HMRC to reduce the tax gap.
• Potential changes to Self Assessment that could lead to more frequent automated payments throughout the year.
• Requirement for all VAT invoices to be issued as structured e invoices from April 2029.

This direction aligns with ongoing digitalisation efforts across the tax system.

A number of additional measures were included in the Budget. Some of these notable additions are below:

• Prescription charges will be frozen at 9.90 pounds for one year.
• The 5 pence fuel duty cut is extended until August 2026, with rates gradually returning to 2022 levels by March 2027.
• The National Living Wage will rise to 12.71 pounds per hour from April 2026.
• The Triple Lock will continue for the duration of this parliament.
• State Pensions will increase by 4.8 percent in April 2026.

There are no changes in the following areas:

• VAT
• IR35
• Business Asset Disposal Relief
• Main corporation tax rates and marginal taper
• Income tax thresholds for PAYE (other than the freezes noted earlier)

The 2025 Budget contains a wide range of measures that will affect taxpayers in different ways over the coming years. Many changes relate to the taxation of property income, savings income and dividends, while others focus on national insurance treatment, reporting requirements and compliance. The interaction between frozen thresholds and rising rates will be an important theme throughout the period covered by the measures.

Taxpayers should take note of the dates when changes begin to apply and consider how these developments may influence their tax position in the future.