Part 1 – Personal Tax, Income, NICs and Investment Changes

The Direction of Travel in the UK Budget 2025-26

Having advised UK taxpayers through multiple economic cycles, it’s clear the UK Budget 2025-26 is not about dramatic headline tax rises. Instead, it is a structural budget one that quietly increases the tax burden through frozen thresholds, adjusted reliefs, and long-term policy shifts.

For most households and business owners, the real impact won’t be felt on Budget Day. It will be felt gradually — in higher effective tax rates, reduced allowances, and tighter cash flow — unless proactive planning is put in place.

Income Tax: Threshold Freezes Become the Real Tax Rise

The most significant personal tax measure remains the continued freeze on income tax thresholds, now extended well into the next Parliament.

These thresholds remain unchanged until at least April 2031.

Why This Matters in Practice

In real terms, this is a tax rise. As salaries increase due to inflation or promotion, more income is pulled into higher tax bands.

A professional earning £49,000 in 2024 may drift into higher-rate tax within a year or two without any real increase in purchasing power. This is the classic “fiscal drag” effect, and it is now the government’s primary revenue-raising tool.

In practice, this makes pension contributions, salary sacrifice arrangements, and Gift Aid donations more valuable than ever for higher-earning employees.

Personal Allowance Withdrawal Still Traps Upper Earners

The personal allowance continues to taper once income exceeds £100,000, disappearing entirely at £125,140.

This creates an effective marginal tax rate of 60% between £100,000 and £125,140.

In practical advisory terms, this is one of the most punitive zones in the tax system. I routinely see clients reduce their tax bill dramatically by:

·        Increasing pension contributions

·        Adjusting bonus timing

·        Using employer benefits efficiently

None of these strategies was changed by the Budget — but their importance has increased.

National Insurance: More Paid, Fewer Notices

Employee National Insurance thresholds remain aligned with income tax bands and frozen.

However, the more material change sits with the employer, National Insurance:

·        Employer NIC rate increased to 15%

·        Secondary threshold reduced to £5,000

This significantly increases employment costs for small businesses and owner-managed companies.

Example: Director Salary Impact

A director paying themselves £12,570:

·        Previously incurred little or no employer NIC

·        Now faces over £1,100 per year in additional NIC cost

This alone changes the salary-dividend balance for many small companies and makes employer pension contributions far more attractive.

Dividend Tax: Gradual Increases Ahead

While dividend tax rates do not change immediately, increases are legislated for future years.

The dividend allowance remains just £500.

For company owners, this means:

·        More tax on profit extraction

·        Reduced attractiveness of dividends alone

·        Greater emphasis on timing, pension planning, and retained profits

Savings Income: Quite Increases Planned

Savings income tax rates will increase in future years, with thresholds remaining frozen.

Although this appears minor, it disproportionately affects:

·        Retirees

·        Higher-earning professionals

·        Individuals with investment income outside ISAs

ISAs remain untouched — reinforcing their position as one of the most effective tax shelters available.

Relief Ordering Rules: A Subtle but Important Shift

From April 2027, certain reliefs and allowances — particularly those related to property and investment losses — will apply later in the income tax calculation.

In practical terms, this reduces their ability to shelter other income sources.

This matters most for:

·        Landlords with mixed income

·        Investors with carried-forward losses

·        Individuals relying on reliefs to manage marginal rates

The change is technical, but the tax impact is real.

Business, Property, Capital Gains, Pensions and Compliance

Corporation Tax: Rates Stable, Extraction More Expensive

Corporation Tax rates remain unchanged:

While stability is welcome, the cost of extracting profits has increased through:

·        Higher employer NICs

·        Higher dividend tax rates

·        Reduced allowances

For owner-managed businesses, the focus must shift from “how much tax do I pay?” to “how do I extract value efficiently?”

Capital Gains Tax: Low Allowances Are the Real Issue

The CGT annual exemption remains at:

·        £3,000 for individuals

·        £1,500 for trusts

Rates remain unchanged, but the reduced allowance means CGT is now a routine issue.

Real-World Example

A landlord selling a property with a £40,000 gain:

·        £37,000 taxable

·        CGT at 24% = £8,880

Five years ago, the tax would have been nearly half that.

Planning the timing of disposals, ownership structures, and use of spousal allowances is now essential rather than optional.

Property Tax: No Relief for Individual Landlords

Mortgage interest relief restrictions remain fully in place.

Higher-rate landlords continue to be taxed on gross rental income, not real profit.

This leads to artificially high tax bills and, in some cases, cash losses despite “profitable” properties on paper.

This Budget offers no relief — reinforcing the long-term trend away from individual buy-to-let ownership and toward:

·        Corporate structures

·        Portfolio rationalisation

·        Selective disposals

Stamp Duty: A Continuing Barrier to Entry

Stamp Duty Land Tax rates remain unchanged, including the 3% surcharge on additional properties.

For investors, SDLT remains one of the highest upfront costs, often exceeding legal and refurbishment costs combined.

From a planning perspective, this makes long-term holding strategies more important than frequent trading.

Pensions: Still the Most Powerful Tax Planning Tool

The annual pension allowance remains at £60,000, with carry-forward intact.

The removal of the Lifetime Allowance cap has simplified planning, although new lump sum limits apply.

From an adviser’s standpoint, pensions now offer:

·        Corporation Tax relief

·        No National Insurance

·        Tax-deferred growth

·        Estate planning advantages

For directors and high earners, pensions remain unmatched in tax efficiency when used correctly.

Student Loans: The Hidden Marginal Rate

Student loan thresholds remain frozen.

As earnings rise, repayments increase automatically, often stacking on top of:

·        Income tax

·        National Insurance

For many professionals, this pushes the true marginal rate above 50%, particularly when combined with the personal allowance taper.

This is rarely visible on payslips but very real in take-home pay.

Behavioural Taxes: Small Changes, Long-Term Impact

The Budget introduces or confirms:

·        A future road-usage charge for electric vehicles

·        Increased gambling levies

·        Expanded environmental charges

These are not immediate shocks, but they mark a shift away from tax-free incentives and toward usage-based taxation.

HMRC Compliance: More Enquiries, Less Tolerance

Increased funding for HMRC compliance means:

·        More self-assessment checks

·        Greater scrutiny of property income

·        Closer monitoring of capital gains and crypto activity

The rules themselves haven’t tightened dramatically — but enforcement has.

Accurate records, timely filings, and defensible positions are no longer optional.

What This Budget Really Means

From a professional tax adviser’s perspective, the UK Budget 2025-26 is best described as quietly restrictive.

There are no dramatic shocks — but also no easy wins.

Those who:

·        Plan early

·        Use allowances fully

·        Adapt structures to current rules

Will manage their tax exposure effectively.

Those who don’t will simply pay more — slowly, steadily, and often without realising why.