The 2025 Budget sets out an economic strategy aimed at containing the cost of living, safeguarding the quality of public services, with particular focus on the NHS, and strengthening the stability of public finances. The measures planned for 2026–2027 aim to support a moderate reduction in inflation and stabilise the macroeconomic environment. While the main Income Tax, National Insurance and VAT rates remain unchanged, the ongoing freeze of several tax thresholds will gradually push more taxpayers into higher tax brackets, intensifying the impact of fiscal drag.
1. Cost of living
The immediate measures introduced with the 2025 Budget aim to alleviate the cost of living through targeted interventions on energy, transport, wages and pensions. Average energy bills are expected to fall by £150 from April 2026. Regulated rail fares and prescription charges will be frozen for the 2026–27 tax year, with prescription charges maintained at £9.90. The 5p reduction in fuel duty will also be extended until August 2026, with a gradual return to pre-2022 levels by March 2027. Regarding wages, the National Living Wage will rise to approximately £12.71 per hour from April 2026, while the maintenance of the Triple Lock will ensure a 4.8% increase in State Pensions.
2. Employment income and NIC
The 2025 Budget keeps Income Tax and National Insurance rates unchanged while extending the freeze on key tax thresholds. The Personal Allowance remains at £12,570, the 40% threshold stays at £50,270, and the additional rate threshold remains at £125,140. NIC thresholds for employees and the self-employed are also frozen at current levels for the period 2028–2031. For employers, the threshold at which NIC becomes payable will be set at £5,000 per employee from 2028 to 2031. In practice, although tax rates do not rise, the threshold freeze will gradually push more taxpayers into the 40% and 45% bands.
3. Property income, dividends and savings
The 2025 Budget introduces a set of measures affecting capital income, particularly rental income, dividends and interest, with a more significant impact compared to employment income. From 6 April 2027, new dedicated tax rates will apply to rental income: 22% (property basic rate), 42% (property higher rate) and 47% (property additional rate). Regarding dividends, from 6 April 2026 the rates will be set at 10.75% for the basic band, 35.75% for the higher band and 39.35% for the additional rate. In the same year, the dividend tax credit for non-residents on UK-source dividends will be abolished. From 6 April 2027, all savings income tax rates will increase by two percentage points, to 22%, 42% and 47% respectively. Additionally, from 2027 deductions and allowances used in the Income Tax calculation will be applied first against employment or pension income and only afterwards to property, savings and dividend income. Overall, while employees are mainly affected by frozen tax bands, those receiving rental income, dividends or interest will face higher taxation on capital income even with unchanged income levels.
4. Wealth, inheritance, CGT and high-value property
The 2025 Budget introduces significant changes in wealth and inheritance taxation. From 2028, England will introduce a High-Value Council Tax Surcharge for properties worth over £2 million, with an additional annual charge between £2,500 and £7,500 for properties above £5 million, affecting fewer than 1% of homes. Inheritance Tax thresholds remain frozen until 2031, while from 2027 unspent pension pots will more widely fall within the scope of IHT. Regarding capital gains, from 2026 the rate applicable to Business Asset Disposal Relief and Investors’ Relief will rise to 18%, and the exemption for Employee Ownership Trusts will be reduced to 50%.
5. Voluntary contributions, expats and pension planning
From 2026, Class 2 contributions can no longer be paid from abroad, and Class 3 contributions will be permitted only with at least ten years of UK residence or contributions. From 2029, pension contributions paid through salary sacrifice exceeding £2,000 per year will be subject to NIC. For individuals with “mixed” UK–Italy careers or those contributing from abroad, these changes require a reassessment of pension planning before 2026.
6. Employees, self-employed and Self Assessment
The 2025 Budget introduces several important measures for employees, self-employed individuals and Self Assessment taxpayers. From 6 April 2026, employees will no longer be able to deduct unreimbursed home-working expenses; however, correctly reimbursed expenses will remain tax- and NIC-free. From 2029, taxpayers with PAYE-taxed income who are nevertheless required to file a Self Assessment return will pay a larger share of taxes during the year, resulting in a smaller final balance but requiring careful cash-flow monitoring. On digitalisation, the Making Tax Digital system is updated with limited new exemptions, revised deadlines moved to 2027, and confirmation of full mandatory adoption for certain categories. The penalty reform also continues, aiming to strengthen HMRC enforcement.
7. Electric vehicles, travel and consumer measures
From 2028, the Electric Vehicle Excise Duty (eVED) will apply to electric and plug-in hybrid vehicles, calculated on miles driven and set at roughly half the fuel duty paid by petrol or diesel vehicles. The estimated average cost for an EV driver is around £240 per year. Initially, eVED will not apply to vans, buses, motorcycles, coaches or HGVs. By March 2029, the exemption from customs duties on online purchases under £135 from overseas will be abolished, likely increasing the cost of small parcels and supporting domestic retail. Further increases are planned, at or above inflation, on tobacco duties, certain alcohol categories and Air Passenger Duty, with specific increases for private jets.
8. Businesses and professionals
Significant measures are introduced for companies and professionals. From 1 January 2026, a 40% First Year Allowance will be available for many assets at the main rate, including leased assets and assets owned by sole traders. At the same time, from 2026 the main rate of writing-down allowances will be reduced from 18% to 14%. In the construction sector, HMRC’s powers under the Construction Industry Scheme will be strengthened, with new incentives for reporting significant tax fraud.
Practical impact
- For those with only employment or pension income, the threshold freeze may push more income into the 40% and 45% bands.
- For property, dividends and investment portfolios, taxation on capital income will rise from 2026–27, reducing the effectiveness of allowances.
- For expats and individuals with mixed UK–Italy careers, the NIC, pension and IHT changes require updated retirement and estate planning.
- For companies and sole traders, new capital allowances create opportunities, while compliance requirements under MTD, CIS and HMRC controls become more complex.
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Author: Angelo Chirulli, Tax Advisor, Diacron London