Budget 2025: navigating the changes

Posted: 27/11/2025

A year on from the current government’s first Budget, the Chancellor of the Exchequer has returned to the despatch box with measures that continue to shape the UK’s fiscal landscape. The announcements followed a period of unprecedented speculation around the Chancellor's intentions, which also rather unusually included an accidental leak by the Office of Budget Responsibility with details of their report on the changes a few hours in advance of the Chancellor's announcements. 

From a private client perspective, the changes were not as significant as the important developments contained in last year's Budget. The announcements included additional measures, taxes as well as some useful clarifications and reliefs in relation to last year's announcements. Positively, the government has not introduced feared measures including an exit tax or wealth tax, which could be seen as an acknowledgment that it is important that the UK remain attractive to entrepreneurs and wealth creators. Many of the new measures introduced from a commercial perspective are intended to encourage business investment and innovation. 

The effective dates for the new measures vary extensively from those coming into effect immediately, to those taking effect from 6 April 2026 and even from 6 April 2029. Some of these delayed changes could mean it is viewed as spend now pay later Budget. An IHT relief on last year's changes to Excluded Property Trusts has also been introduced with retrospective effect to 6 April 2025. Although additional detail and draft legislation is awaited, the headline proposals from the 2025 Budget are detailed below, with deeper analysis of the more significant reforms to follow.

Income tax

The Budget introduces several income tax changes which, though apparently modest individually, will cumulatively raise the burden on many taxpayers.

Freeze on thresholds
Personal income tax and National Insurance thresholds will remain frozen until April 2031, extending the current freeze by three years. This 'fiscal drag' means more earners will be drawn into higher tax bands as wages rise, increasing liabilities without headline rate rises. This is predicted to raise an additional £3.5 billion in revenue in 2028/29 rising to £12.7 billion by 2030/31. Middle-income households are more exposed to this, whilst the effect on high-net-worth individuals will be compounded when combined with frozen thresholds and potential future changes to other taxes. Proactive planning, such as restructuring income and using tax-efficient investments should all be considered to mitigate the gradual impact of stagnant tax bands.

Dividend income
The rate of income tax on dividends will increase by 2% for basic and higher rate bands (but not the additional rate band which will remain as 39.35%) with effect from 6 April 2026. For basic rate taxpayers this means that the rate will be 10.75% and for higher rate taxpayers it will be 35.75%. The dividend allowance remains unchanged. The increased rate of income tax on dividends is estimated to raise £2 billion annually and will particularly impact small business owners, entrepreneurs and investors who rely on distributions. 

Savings income and ISAs
Income tax on savings interest will also rise by 2% from 6 April 2027, particularly affecting pensioners and cash-reliant savers. This 2% increase will take tax rates to 22%, 42% and 47% respectively depending on an individual's marginal rate of tax.   

The total annual ISA allowance remains unchanged at £20,000. However, from 6 April 2027 the cash allowance element will be capped at £12,000 (for the under-65s) with the remaining allowance restricted to stocks and shares ISAs. Whilst this change reduces flexibility it is designed to encourage diversification with investments. 

Property rental income
From 6 April 2027, landlords will face an increase of 2% to the basic, higher and additional rate of income tax on rental income. This again will increase tax rates to 22%, 42% and 47% respectively. This is estimated to raise £0.5 billion a year for the Treasury.  

Coupled with the rise in Stamp Duty Land Tax on the purchase of additional residential property from 3% to 5% in 2024's Autumn Budget, the introduction of the Renters' Rights Act and new energy efficiency requirements, this increase may further unsettle landlords who hold residential properties personally. This may be exacerbated in relation to high value rental properties given that the new surcharge, discussed below, will apply to landlords of high value properties and not occupiers in England. 

This greater burden on individual landlords may lead some to consider either restructuring the way in which their property (or property portfolio) is held or to exit this sector, which may lead to a reduction in the supply of rental properties. This may, in turn, lead to a long-term rise in rental receipts if demand outstrips supply.

High Value Council Tax Surcharge (HVCTS) – 'Mansion Tax'
One of the more anticipated changes introduced in the Budget is HVCTS, which is a new tax on owners of property in England worth £2 million or more in April 2026, and set to take effect from April 2028. It is property owners rather than occupiers who will be liable for the surcharge. There will be continued liability to pay the existing Council Tax in addition to HVCTS, both being administered by the Local Authority.  The annual charges will be as follows for properties valued: 

These charges are set to increase in line with CPI inflation each year from 2029/30 onwards. The Valuation Office will conduct a targeted valuation exercise to identify properties within scope of the charge. The Treasury say that HVCTS is calculated to raise £430 million each year from 2028/29. There is set to be a government consultation on the effect on more complicated property ownership structures including companies, funds, trusts and partnerships and, for example, where occupation of a property is a condition of employment. Further details on how and when properties will be valued and the mechanics of the HVCTS are not yet available.

Venture Capital Trusts (VCT) relief and Enterprise Investment Schemes (EIS)
Income tax relief on VCTs will fall from 30% to 20% from 6 April 2026, reducing incentives for high-risk investment.

From 6 April 2026, the lifetime company investment limit under the EIS will increase to £24 million (£40 million for knowledge intensive companies (KICs) and the annual company investment limit will increase to £10 million (£20 million for KICs). The gross assets test will increase to £30 million before share issue and £35 million thereafter. This is a useful development meaning that relevant companies may continue to utilise the relief as they scale and grow. 

Capital Gains Tax (CGT)

Whilst many feared CGT rate hikes to align the tax with income tax bands, the removal of the CGT uplift on death, or even the abolition of the CGT relief on the disposal of main residences, in the end none of these have been introduced. However, there were some changes introduced by the Chancellor. The key changes announced are set out below. 

Reduction in CGT Relief for Employee Ownership Trusts (EOTs)  
Previously, subject to various conditions, disposals of company shares to an EOT were fully exempt from CGT. With effect from 26 November 2025, 50% of the gain will be subject to tax immediately on the disposal. The remaining 50% can be held over until a future disposal of the shares by the trustees of the EOT. This change takes immediate effect, so current or planned transactions will need to be reviewed.

Share Reorganisations and Share for Share Exchanges 
The current anti-avoidance rule for share-for-share exchanges and schemes of reconstruction, which in some cases denied rollover relief to all the shareholders participating in the transaction, has been amended with immediate effect so that it only affects those shareholders benefiting from the tax avoidance. The quid pro quo of this limiting of the rule is that the previous 5% de minimis threshold has been repealed. Now, any shareholder who has benefited from the tax avoidance, however small their shareholding, will be denied rollover treatment.

Disposals of UK land by non-UK resident companies
Ordinarily, non-UK residents are usually subject to CGT in relation to disposals of UK land. Anti-avoidance provisions include charges that also charge to tax disposals of interests in property rich entities. Currently, property richness and substantial indirect interest tests apply to protected cell companies as a whole, which often means that disposals from within individual cells are not subject to tax. With immediate effect, the tests to determine 'property richness' and determining a substantial interest will apply to relevant protected cell companies at an individual cell level and not at a company level only.

Incorporation Relief
Additional conditions have been introduced in relation to incorporation relief. In particular, a claim for relief must be made by the transferor in their Self-Assessment return for the tax year in which the transfer took place. Details regarding the transaction, the tax computations and type of business transferred will need to be provided.

Enterprise Management Incentives (EMI)
EMI options are often a tax efficient means of incentivising employees. This has been further enhanced with increases to some of the limits relating to EMI schemes. The limits have been extended as follows:

• the value of unexercised options in a company from £3 million to £6 million;
• the gross assets of the company from £30 million to £120 million; and
• the number of employees by the company from 250 employees to 500 employees.

The changes will apply to EMI contracts granted on or after 6 April 2026 and can also apply retrospectively to existing EMI contracts which have not already expired or been exercised with the limit on the exercise period being increased from 10 years to 15 years. Existing contracts can be amended without losing the tax advantages the schemes offer, provided it is in line with the legislation.

While not strictly a CGT change, these increases will affect the calculation of the CGT liability for those offering such schemes.

Inheritance tax (IHT)

Although several changes were anticipated, the Autumn Budget 2025 has left the rules on lifetime gifting untouched, which is reassuring for clients looking to plan ahead. As a result, the existing IHT framework for lifetime gifts (including the seven-year rule for 'potentially exempt transfers') remains unchanged. The nil rate bands will remain fixed to April 2031, meaning more estates will become liable for IHT over time as asset values increase.  

The government have announced some welcome tweaks to the significant changes introduced in the 2024 Autumn Budget. In particular, with regard to the previously announced changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) that will take effect from 6 April 2026, any unused £1 million allowance for the 100% rate of APR and BPR will now be transferable between spouses and civil partners (including if the first death was before 6 April 2026). Farming and business communities, however, will be disappointed that the government reconfirmed its commitment to the wider APR/BPR reforms in the Budget.

The previous Budget had also stated that with effect from 6 April 2027, most unused pension funds and death-benefit payments will be included as part of a deceased's estate for IHT. This Budget provides that personal representatives (who will be responsible for the payment of IHT) will be able to direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months and pay IHT due in certain circumstances. Furthermore, personal representatives will be discharged from a liability for payment of IHT on pensions discovered after they have received clearance from HMRC. This is a useful update. 

Payments made under the Infected Blood Compensation Scheme will now be exempt from IHT where an individual has died before the compensation is paid. In addition, first living recipients of compensation will have a two-year window in which they can gift some or all of the compensation without incurring an IHT charge. 

International individuals (former non-doms)

Excluded Property Trusts (established prior to 30 October 2024)
There has been some indication that there will be minor roll-backs of last year's major announcements on the changes to Excluded Property Trusts, with a cap of £5 million applying to IHT due in relation to relevant property charges for trusts established before 30 October 2024 in each ten-year cycle. The cap will apply retrospectively to charges incurred from 6 April 2025. The majority of trusts are unlikely to benefit from this measure, but it will provide welcome relief to trusts holding significant value. 

Temporary Non-UK Residence Rules
The temporary non-residence rules subject an individual to income tax or CGT if the individual becomes UK resident again after a period of temporary non-UK residence. These rules have been extended to also apply to abolish relief that applied in relation to dividends declared by close companies where the dividend included 'post-departure' trading profits. 

Temporary Repatriation Facility (TRF)
The government has released updated draft legislation on the changes that they announced in last year's Budget in relation to the TRF. These offer much needed clarification on how these new rules operate and further analysis on the proposals will follow shortly. 

Agricultural Property held through non-UK entities
Additionally, non-UK entities holding UK agricultural property will be treated as UK situs assets. Again, the specifics of this will be provided in due course, but we anticipate this may mirror the existing rules for non-UK entities holding UK residential property.

Pension changes

Currently, both employee and employer pension contributions made through salary sacrifice arrangements are exempt from National Insurance contributions (NICs). From April 2029, this exemption will be restricted: only the first £2,000 of an employee’s contributions will remain free of NICs. Any contributions above this threshold will attract both employer and employee NICs. Employers will be responsible for ensuring the correct amounts are reported and paid to HMRC via PAYE. By contrast, employer contributions to salary sacrifice pension schemes will continue to be exempt from NICs. Importantly, these changes do not affect income tax relief on pension contributions, which will remain available. 

Further announcements

In addition to the above headline tax announcements, the government confirmed several wider fiscal measures. Some of which are mentioned below.  

The freeze on Fuel Duty will be further extended until September 2026, after which the 5p-per-litre cut introduced in 2022 is scheduled to be withdrawn in three stages.

The previously announced expansion of the Soft Drinks Industry Levy, otherwise known as the 'Sugar Tax', has been confirmed to include bottled milkshakes, flavoured milk and milk substitute drinks from 1 January 2028. 

A significant restructuring of gambling taxation was announced. From April 2026, the rate of Remote Gaming Duty will increase from 21% to 40%, and, from April 2027, a new 25% rate for Remote Betting Duty will be introduced, excluding self-service betting terminals, spread betting, pool bets, and horseracing. As part of the same reform, Bingo Duty will be abolished from April 2026. 

There will be additional investment for the digitisation of HMRC systems and the expansion of investigation and enforcement capacity. These measures are intended to support improved tax debt recovery, reduce non-compliance and enhance data-driven administration. The OBR estimate that these measures will raise £2.3 billion annually by 2029/30. This represents an increased focus on enforcement and operational efficiency. In practical terms, individuals and businesses can expect closer scrutiny of compliance, increased use of real-time data, and potentially more proactive intervention where liabilities are overdue or disputed. 

This Budget is the start of the process and further detail and draft legislation over the next few months are expected.  

If you would like to discuss the impact of these changes or have any other concerns as a result of this Budget, please contact us for further information. 

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