Autumn Budget 2025

Rachel Reeves’ second budget as Chancellor introduces £26 billion in revenue raising measures, including an extended freeze on tax thresholds, tax increases for dividends, savings and rental income and changes to salary sacrifice.

Notably, there were no reforms to tax-free cash on pensions, pension tax relief or IHT (Inheritance Tax) caps on gifting, despite months of rumour and speculation. The main rates of income tax and NI (National Insurance) are also unaffected.

Read our summary of the main points affecting pensions, savings and investments:

Pensions

The main headlines are notable for what hasn’t changed as well as what has.

Tax relief on pensions – no change.
Tax-free cash – no change.
Salary sacrifice – limit on National Insurance exemption

From April 2029, the National Insurance (NI) exemption for pension contributions made by salary sacrifice will be limited to £2,000 a year. This means that both employees and employers will have to pay NI on any salary sacrificed over this amount.

So, for example, in a scheme where employees make pension contributions of 5% of earnings via salary sacrifice, this would impact employees whose earnings exceed £40,000.

The change will have the biggest impact on those earning below the upper earnings limit (UEL) – currently £50,270 – as they will have to pay NI of 8% on any amount sacrificed over £2,000. NI for employees on earnings above the UEL is 2%. Employers will have to pay NI of 15% on any salary sacrifice over the £2,000 limit.

Those affected will see a reduction in their take home pay – but that may not be the only consequence. Employers often agree to share part of their NI saving with employees by boosting their pension contributions, so this change will likely result in a smaller pension pot at retirement for many employees.

It may be beneficial for some employees to still sacrifice salary above the limit to continue to receive Child Benefit or tax-free childcare.

State Pensions

The triple lock on State Pensions will be retained for the remainder of this parliament, guaranteeing a 4.8% earnings-based increase in April 2026.

This means that the full New State Pension will increase to £241.30 a week and the full Basic State Pension will increase to £184.90 a week (single person) or £295.70 a week (married couples and civil partners).

With State pensions for some pensioners likely to exceed the Personal Allowance (PA) from April 2027 due to the triple lock and the freezing of the PA, the government is exploring how best to ensure that pensioners, whose only income is the Basic or New State Pension, don’t have to pay small amounts of tax via Self Assessment.

Inheritance Tax (IHT) on pensions

Unused pensions will be brought into the calculation of IHT from April 2027, as previously proposed. Under the proposals personal representatives (PRs) are responsible for calculating and paying the IHT due from the pension scheme.

There will be a tweak to the proposed process to give the PRs the power to ask the pension scheme to withhold 50% of the taxable benefits for up to 15 months and to pay the IHT due in certain circumstances. The PRs will also no longer be liable for the payment of any IHT due on pensions discovered after they have received clearance from HMRC.

This will give PRs some much needed flexibility to pay the IHT due. However, a better solution would have been to find a completely different way of taxing pension benefits on death – something most of the pension industry have spent the last year urging HMRC to do. It’s disappointing that HMRC has chosen again to stick with the hard administrative path, rather than thinking about the grieving families who will sadly get caught up in this administration nightmare at the time they are most vulnerable.

Income tax and national insurance

As widely predicted, the Chancellor confirmed that the personal allowance, higher rate threshold and additional rate threshold will be frozen until 2030-31. The thresholds for Scotland will be confirmed in the Scottish Budget in January 2026.

The secondary threshold for NICs will also be frozen at £5,000 until 2030-31. This is the threshold above which employers must collect and pay NI on an employee’s earnings. There were no increases to NI rates.

The rate of tax on dividends and savings income will rise by two percentage points. The same increase will also apply to rental income from property. This means:

• From April 2026 dividends taxed at the ordinary rate and upper rate will increase to 10.75% (currently 8.75%) and 35.75% (currently 33.75%) respectively. There will be no changes to the additional rate which remains at 39.35%. The dividend allowance is unchanged at £500 pa.
• From April 2027 tax on savings income (e.g. deposit interest) will increase by two percentage points in each tax band. Savings income falling in the basic, higher and additional rate bands will therefore be taxed at 22%, 42% and 47% respectively. The increases will also apply to chargeable event gains on investment bonds which are taxed as savings income.
• From April 2027, the rates of tax on property income will be 22%, 42% and 47%, depending on whether such income falls in the basic, higher, or additional rate bands.

These rises emphasise the importance of sheltering tax on dividends and savings in an ISA where possible (or a pension for longer term savings).

Other announcements affecting a smaller number of taxpayers include:

• Investors in VCT schemes will see upfront Income Tax relief reduce from 30% to 20% from April 2026.
• From April 2027 the income tax ordering rules will change meaning that the personal allowance must be set against earned income and pensions before dividend income, savings income and property income.

ISAs

Although the Chancellor maintained the overall annual ISA limit at £20,000, from April 2027, only individuals aged 65 and over will be able to save the full £20,000 into a Cash ISA.

For those under 65, the Cash ISA limit will be capped at £12,000, with the remaining £8,000 allowance available only for investment into a Stocks and Shares ISA.

There will also be a consultation on reforming Lifetime ISAs. The proposal will be to replace Lifetime ISAs with another ISA product aimed at first time buyers. The consultation is expected to be published in early 2026.

Mansion Tax

The chancellor stopped short of introducing a full-blown wealth tax. Instead, she announced the introduction of new High Value Council Tax Surcharge on properties worth £2 million or more.  The surcharge, which will be introduced from April 2028, is payable by the homeowner and is in addition to any existing council tax. Properties will be valued by the Valuation Office and the surcharge applied as follows:

A consultation will be issued on the application of the charge for properties with complex ownership structures such as trusts and businesses.

Still to come…..

The HMRC will be issuing further tax related documents over the coming days providing further detail on these announcements.

Please note that this is a summary of the budget based upon our understanding of the announcement.  This is not intended to be tax or financial advice.  You should obtain appropriate advice regarding your personal circumstances in all cases.   No action must be taken or refrained from based on the content of this article alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction.