Budget 2025: What It Means For You
Chancellor Rachel Reeves delivered her second Budget on November 26, and taxpayers face the highest tax burden on record as a result.
Frozen tax thresholds for everything from income tax to inheritance tax, a change in the use of salary sacrifice to make pension contributions, and a host of other measures mean the Chancellor should swell the Treasury’s coffers by as much as £26 billion in 2029/30.
You could be forgiven for thinking that, under a Labour Government, the richest in the UK would be footing most of the bill. But the reality is very different, and even the Chancellor admitted that “ordinary people will have to pay a little bit more”. That little bit more will take the UK’s overall taxation to the highest level since records began, amounting to 38% of GDP in 2030/31.
Which measures are raising the most money?
The freezing of the income tax and National Insurance thresholds is set to raise the most money. These have been frozen since 2022 and were expected to begin rising again in 2028. But Rachel Reeves has extended the freeze from 2028 to 2031, raising an extra £12 billion due to this extension alone, according to the Office for Budget Responsibility (OBR). This is a volte face compared to her previous Budget, where she said any extension of this freeze would hurt working people.
In a never-seen-before event, information contained in the Budget was released early, hours before the Chancellor stood up to deliver her Budget speech in the Commons, thanks to a mistake by the OBR which put the details on its website too soon.
Rachael Griffin, tax and financial planning at Quilter, said: “The multiyear freeze on income tax thresholds has now been extended, locking households into one of the most powerful stealth tax rises in modern fiscal policy.
“Reeves has had to renege on what was her rabbit out of the hat moment at her maiden Budget. Given in her speech last year, she said that an extended freeze would hurt working people, this must represent breaking the party’s manifesto pledge.”
A surprising amount of money, up to £4.7 billion in 2029/30, is expected to be raised in additional National Insurance Contributions (NICs) because of the change to salary sacrifice, which will limit the amount of National Insurance relief you can receive to £2,000 a year.
Salary sacrifice is the way that many people put additional money into their pension, as taking an amount from your gross salary means your employer and you as the employee, don’t pay National Insurance contributions on the money. There is currently no limit on how much you can add to your pension this way.
Who will be most affected by this change to salary sacrifice?
The people most affected by this change, which will be in place from April 2029, are those in the private sector who use this method to add money to their pension. This is something that isn’t typically done in the public sector, said Mike Ambery, Retirement Savings Director at Standard Life, part of Phoenix Group.
He added: “Salary sacrifice has long been one of the most efficient ways for workers to boost pension contributions, so limiting it will inevitably increase costs and reduce take-home pay for many.
“At a time when simplicity and engagement are critical to improving savings levels, adding complexity and reducing incentives risks undermining confidence in the system. It’s also vital that consideration is given to the timing of this change.
“People will want to make use of [this] arrangement to the full extent they’re able to. Employers will still face a considerable amount of administration to comply and will need to put thought into communication. It’s also still unclear how the mechanics of the new cap will apply when people move between employers – in all likelihood, this will add further complexity. Payroll systems will need to be updated, and employers will have to manage compliance across multiple schemes and employee movements.”
What other measures were announced?
Other measures announced included a new High Value Council Tax Surcharge which affects properties worth more than £2m. There is a scale of charges for properties worth £2m to £5m or more.
The lowest surcharge, which applies to properties worth between £2m and £2.5m, is £2,500. For those valued between £2.5m and £3.5m, the surcharge is £3,500. Properties worth between £3.5m and £5m will face a surcharge of £5,000, and those worth £5m or more, will pay a £7,500 surcharge.
Landlords will also be hit with an additional 2% tax charge on their rental income from April 2027, which will take the income tax rate paid on rental income up to 22% for basic rate taxpayers, 42% for higher rate taxpayers, and 47% for additional rate taxpayers.
Electric vehicles and plugin hybrid vehicles will also face a new tax. Electric vehicle drivers will pay a charge of 3p per mile from 2028, while plugin hybrids will pay 1.5p per mile, making these vehicles considerably more expensive to run. But fuel duty continues to be frozen for now.
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If you are concerned about how any of the measures might affect you, then please get in touch with us and we will explain what you need to know.
