Key changes from Rachel Reeves’ Budget 2025

Rachel Reeves’s long-awaited budget arrived earlier than expected, as it was published by the Office for Budget Responsibility an hour before it was supposed to be delivered in Parliament, leading to unprecedented scenes in the House of Commons.

The key changes were:

•  Frozen tax bandings 

  Having already been frozen from 2021until 2028, there were rumours of an extension until 2030, but in fact the freeze was extended for three further years to 2031.  The impact of this over a decade will be significant as was explored in this recent article from The Times to which The Private Office were pleased to contribute. 

•  A 2% increase on Dividend, Savings and Rental Income Tax

  Dividend tax rates will increase from 8.75% and 33.75% to 10.75% and 35.75% respectively for basic and higher rate taxpayers with effect from April 2026.  Additional rate dividend tax will remain unchanged at 39.35%

  Savings and Property income tax will increase from 20%, 40% and 45% to 22%, 42% and 47% for basic, higher and additional rate taxpayers with effect from April 2027.

• The Cash ISA allowance will be limited to £12,000 with effect from April 2027 for under 65s 

  This had been widely rumoured, but investors will be pleased to see the Stocks & Shares ISA remaining at £20,000 and for the over 65s they can still use the cash ISA allowance in full.

• Salary sacrifice on pension contributions

  With effect from April 2029, there will be a limit of £2,000 p.a. for pension contributions being paid directly into workers’ pensions, thereby saving national insurance being paid on the income. However, investors will be pleased to see tax relief on pension contributions remaining unchanged.

• A mansion Tax on homes worth over £2,000,000 

  This will be set at a rate of £2,500 for homes valued at over £2m, rising to £7,500 for homes valued at over £5m and will come into effect in 2028 .

• Agricultural and Business Property Relief threshold of £1m can be transferred between spouses if unused on death

  This will have been welcomed by Business Owners and Farmers as assets will no longer need to be passed to children on first death to take advantage of the additional Agricultural and Business Property relief, though many may have already changed their Wills to reflect the previous rules so further planning may now be required.

• Failed pre-1997 pensions that have entered the Pension Protection Fund (PPF)

  Individuals will benefit from indexation in a boost for those who lost out when their scheme failed.

•  Infected Blood Compensation Scheme 

  The government has confirmed that compensation will be relieved from Inheritance Tax. This has caused a great deal of distress over the years to a number of families so this will be a welcome change.

• Tax relief on VCT investments reduced from 30% to 20% from April 2026  

  The government says this will better balance the amount of upfront tax relief offered compared to EIS investments, where dividend relief is not available. 

As well as the above changes, it is important to acknowledge the following areas that did not change despite strong rumours prior to the budget:

• Income Tax rates
• Pension contribution tax relief
• Pension tax free cash
• Capital Gains Tax rates

At the time of writing, Bond markets appear to have digested the budget relatively well, with Gilt rates remaining broadly unchanged.

In summary, after months of speculation, many of the rumoured changes did not materialise, but the combination of further frozen income tax bandings, increases to dividend, saving and property income tax and reduced cash ISA allowances, will make planning more important than ever.  Many of the upcoming changes will take effect at different times, so there will be opportunities to limit the impact of the changes through careful planning over the coming years.  Pensions remain attractive from a tax relief perspective and Stocks and Shares ISAs remain a tax efficient way of saving.  

If you’d like to discuss the impact of the budget on your finances, why not get in touch to speak to one of our advisers. We’re offering everyone with £100,000 in savings, investments or pension a free financial review worth £500. 

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The Financial Conduct Authority (FCA) does not regulate estate planning or tax advice.

This article is intended as information only and does not constitute financial advice.  

The opinions shared in this article are solely those of the individual and they do not necessarily reflect those of The Private Office.

The information contained in this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.