Chancellor Rachel Reeves explained that she was choosing a budget for “fair taxes, strong public services, and a stable economy.” She aims to cut the cost of living, reduce NHS waiting lists and drive down borrowing and debt.
Income tax
The Chancellor maintained the current income tax rates and personal allowances – but has extended the freeze on income tax thresholds until 2030/31.
The Institute for Fiscal Studies calculates that this move will generate an additional £12.7 billion per year in tax revenue in 2030/31.
Savings and investments
From April 2026, the ordinary and upper rates of tax on dividend income will increase by two percentage points. The tax rate on savings income will increase by the same amount the following year. This will hurt savers, investors, and company shareholders who take some of their earnings in dividends.
There were no changes to capital gains tax rates or allowances, and no mention of the rumoured exit tax.
The allowance for Individual Savings Accounts (ISAs) remains £20,000. However, from April 2027, anyone aged under 65 adding new money will be restricted to a maximum of £12,000 for the cash part, with the balance invested in a stocks and shares ISA.
Pensions
The months leading up to the budget saw much speculation about pension commencement lump sums (PCLS) being hit. The Treasury ruled this out before the budget, and Ms Reeves then confirmed there will be no changes to the tax-free lump sum or the tax reliefs for those paying into a pension.
Instead, the government will increase revenue by targeting pension sacrifice. From April 2029, the amount that can be sacrificed without paying employer and employee National Insurance Contributions will be capped at £2,000 per annum per employee.
Last year’s budget included the significant news that pension funds will fall within the scope of inheritance tax (IHT) from April 2027. This unpopular reform is going ahead, but the government has looked at how the IHT will be paid. We now know that personal representatives will be able to direct pension scheme administrators to withhold 50% of taxable benefits for up to 15 months to enable the inheritance tax to be paid.
Property
One budget rumour that is going ahead is the introduction of a new ‘mansion tax’. The High Value Council Tax Surcharge (HVCTS) will be introduced in England from April 2028 and will impact residential properties worth £2 million and over.
Landlords were in the firing line again. From April 2027, the tax rate on rental income will increase by two percentage points. When combined with previous reforms – the restriction on mortgage interest, capital gains tax, inheritance tax changes, making tax digital, and the renter’s reform bill – property investment is becoming very unattractive in the UK.
The UK will participate in a new international agreement to tackle tax evasion by automatically exchanging information on real estate, expected to start from 2029 or 2030. This impacts anyone not fully declaring property owned and rental income received outside their country of residence.
Inheritance tax
Inheritance tax was a key target in the 2024 budget and many expected further changes this year. However, the rules for Potentially Exempt Transfers (PETs) and lifetime gifts, and the seven-year rule were all left untouched for now.
The inheritance tax personal nil-rate band and the residential nil-rate band will be frozen for another year. They are now scheduled to end in April 2031.
The forthcoming combined allowance for the 100% rate of agricultural property relief and business property relief will go ahead as planned, and will now be fixed at £1 million for a further year until April 2031. However, any unused relief will now be transferable between spouses and civil partners.
Tax planning
Although Rachel Reeves’ second budget was less dramatic than her first, UK taxpayers need to take notice. The measures combined with the 2024 budget create a much higher tax environment, especially for wealthier individuals and families. Higher income, savings and investments, and pension funds have all been impacted, as has the legacy you plan to leave your heirs.
If you live in Portugal, you have more opportunity to reduce your tax burden. It is advisable to re-evaluate the assets you keep in the UK, such as property, investments and even pensions, to establish how moving them outside the UK could improve your position – the tax savings could be significant. Take personalised, professional advice based on your specific circumstances and objectives.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
By Christopher Moore, Partner, Blevins Franks
