Key Takeaways
- A reduced cash ISA allowance and “mansion tax” were key policies announced at the Autumn Budget speech.
- Frozen inheritance tax thresholds are expected to generate more than £14 billion a year from 2030.
- Increases to the UK state pension were confirmed, meaning many pensioners will pay income tax for the first time.
UK taxes will rise to another all-time high as a share of gross domestic product by 2031 as a result of policies unveiled at the Autumn Budget in Wednesday.
Among the main measures in Chancellor Rachel Reeves’ speech was an extension to the freeze on income tax and national insurance allowances until April 2031.
While the chancellor did not in the event raise income tax rates, a subject of intense speculation ahead of the budget, the freeze in income tax thresholds will bring more basic-rate taxpayers into higher-rate tax bands, a process known as “fiscal drag”.
According to Morningstar chief international economist Grant Slade, this was “an interesting choice for a Labour government given that stealth taxes of this nature are regressive, resulting in the UK’s lowest earners paying more tax”.
ISA Allowances Cut in Autumn Budget
Alongside the policy, Chancellor Rachel Reeves said she would also reduce the amount savers can place into cash ISAs, a move that was widely expected, though savers over 65 will retain their full cash ISA allowance.
From April 2027, the maximum that people will be able to hold in cash tax-free in an ISA will be £12,000. The overall cash ISA allowance of £20,000 will remain, meaning any money held above that £12,000 threshold must be invested in stocks and shares to remain free of tax.
“This is a carefully considered solution that promotes the benefits of investing in the stock market for the long term, whilst addressing concerns of older savers who prioritise financial certainty,” says Richard Stone, chief executive of the Association of Investment Companies (AIC), a lobby group for publicly-listed investment trusts.
How Will Inheritance Tax Changes Affect Me?
Another personal finance measure announced Wednesday was a freeze on inheritance tax thresholds for a further year to 2030/31, a policy that the OBR says will generate £14.5 billion a year from eligible estates, from around £9 billion in the current tax year. This is another example of “fiscal drag”, as more estates will become liable for IHT payments as assets such as property rise in value. Speculation ahead of the budget suggested the chancellor would go further in targeting the UK’s inheritance tax gifting regime.
“Inheritance tax is one of the UK’s most hated taxes. What was once a tax on only the wealthiest families will increasingly impact those with even relatively modest estates, who after a decade of frozen thresholds alongside rising house prices, will be snagged by the tax,” says Rachael Griffin, tax and financial planning expert at Quilter.
“Add to that the significant changes coming in April 2027, when pensions will be drawn into taxable estates, and the government looks set to cash in on an ever-expanding pool of taxpayers.”
What Happened to the State Pension at the Autumn Budget?
Alongside other expected measures announced Wednesday was a “triple lock” increase to the state pension that will see the new full state pension increase by about £575.
Experts now expect those in receipt of the new full state pension to be liable for income tax for the first time from 2027 onwards after a number of years of pension tax increases, including a 10% rise in 2023.
“The personal allowance freeze at £12,570 does mean more state pensions will be taxed and that will accelerate in 2027/2028 and subsequent years,“ says Lucie Spencer, financial planning partner at the wealth management firm Evelyn Partners.
This will drag pensioners into the self-assessment tax regime, but the process is expected to be simplified, the chancellor said.
Will I Have to Pay the Mansion Tax?
Among the property policies announced on Wednesday was a “mansion tax” on homes worth more than £2 million—confirmed via a new change to the council tax regime. The charges include a £2,500 annual levy for properties worth more than £2 million, in addition to existing council tax, and £7,500 for properties worth more than £5 million.
The OBR said the policy would raise around £400 million a year. This levy, which will be known as the “high value council tax surcharge”, has been discussed in UK politics in some form since the 2010 election and will now come into effect in April 2028.
The chancellor also said taxes on landlords would increase again, with an additional levy of 2% due on property income from April 2027.
How Will Other Pension Changes Affect Me?
As a result of Wednesday’s budget, the national insurance relief available to workplace pension savers and their employers will be limited from April 2029 to £2,000. Again, this change was trailed ahead of the budget.
Under current rules, employees can sacrifice a segment of their gross pay every month in favor of pension contributions. This decreases the income tax and national insurance contributions for both the employee and their employer.
“That is a practical step, particularly for those on lower and middle-incomes,” the chancellor said.
But experts say the policy is not as progressive as the chancellor claimed.
“Salary sacrifice is a cornerstone of workplace savings,” says Phoebe Nguyen, head of UK asset management sales at Berenberg Asset Management.
In a joint letter to the chancellor prior to the budget, occupational pensions lobby group Pensions UK and the Federation of Small Businesses said the policy would undermine stability.
“We believe these measures would: Damage the UK economy by making employers less competitive, damage the UK pensions industry’s ability to deliver investment by removing money from the system, and damage the pensions of working people by reducing the incentive to save,” they said.
Reducing the tax relief available to employers on salary sacrifice pension contributions is a continuation of a strategy the government pursued at the last Autumn Budget of October 2024, when it opted to get around its pledge not to increase the headline rates of income tax, national insurance, and VAT.
In last year’s speech, the chancellor increased the employer NI contribution rate to 15% from 13.8%, a change that took effect when the new tax year began in April this year. The UK’s largest employers, especially those in retail, say the NI increases have increased their costs and forced them to cut jobs.
Questions Remain Over Budget Leaks
The budget speech followed an unexpected leak of sensitive documents online by the UK Office for Budget Responsibility around midday on Wednesday. This meant that stock, bond and currency markets could react to policies before the chancellor announced them formally. The convention is for the OBR’s forecasts to be published alongside the chancellor’s speech and the breach is likely to lead to a formal inquiry.
At the start of the budget speech, the chancellor said the leak was “deeply disappointing and a serious error on their part”.
