Key Takeaways
- The Autumn Budget raised several key taxes, putting pensioners, landlords, and entrepreneurs in the spotlight.
- ISA changes mean wealthy individuals with significant cash holdings could pay more tax.
- Inheritance tax rules were tweaked but not significantly changed.
Although the contents of Rachel Reeves’ Autumn Budget were well trailed ahead of time, the speech will have made uncomfortable viewing for those on high salaries, with high value homes, those with significant savings and investments and professional landlords who rely on income from property.
“I will make further reforms to our tax system to make it fairer and to ensure the wealthiest contribute the most,” the chancellor said, emphasizing that these taxes will be used to reduce child poverty and rebuild public services.
Tim Service, investment manager for UK small- and mid-cap equities at Jupiter Asset Management, said the key message of the budget was obvious: The rich will have to pay more.
“Chancellor Rachel Reeves opted for stealth tax rises and symbolic measures targeting wealth and property,” he said.
The “mansion tax” on properties over £2 million and £5 million was one of the key policies announced by Rachel Reeves, but a wide range of tax changes affecting high-net worth individuals were announced alongside.
Frozen Allowances Mean More People Will Pay Higher-Rate Tax
While headline tax rates were not increased in the end, the Office for Budget Responsibility forecast that taxes will rise to a record high as a percentage of GDP by the end of the decade.
The key driver of this will be frozen tax thresholds until 2031, letting “fiscal drag” push more people from being basic-rate taxpayers to higher-rate taxpayers—a shift from 20% to 40% tax—and from higher-rate taxpayers to additional-rate taxpayers, which means their tax exposure will rise from 40% to 45%.
UK Current Income Tax Thresholds
- No tax is paid on income up to £12,570, the “personal allowance”.
- Income from £12,571 to £50,270 is taxed at 20%.
- Higher rate tax is charged at 40% on income from £50,271 to £125,140.
- Additional-rate tax of 45% is charged on anything earned above that.
Rachel Reeves Tweaks, but Doesn’t Overhaul, UK Pensions
In the lead up to Nov. 26, speculation that the government might reduce the limit on tax-free cash pension withdrawals was enough to prompt some significant transactions to make use of the existing £268,275 ceiling on tax-free pension withdrawals. There was also talk, as there is ahead of every budget, that the chancellor will remove some of the tax breaks for higher earners paying into their pensions. However, there was no change to the £60,000 annual allowance for pension contributions.
But salary sacrifice pension contributions will now change. From April 2029, national insurance contributions will be charged on salary sacrifice pensions contributions above £2,000 a year. Among other outcomes, this will prevent some high earners diverting all of their annual bonuses into tax-efficient pensions.
Jamie Jenkins, director of policy at mutual insurer Royal London, said pension savers got off lightly this time.
“While unwelcome, restricting salary sacrifice is perhaps the least-worst outcome for pensions,” he said.
“Those being enrolled into a workplace pension will continue to benefit from full income tax relief and mandatory pension contributions. And for now at least, 25% tax-free cash. Amid all the noise, let’s not lose sight of that.”
Key Tax Changes for Affluent Savers and Investors
As well as the “mansion tax”, Reeves’ reduction in the cash ISA allowance was a headline-grabbing policy that will have an impact on all savers and investors. The aim is to divert money away from cash toward stocks, but it will affect wealthier Britons the most.
From April 6, 2027, the annual ISA cash limit will be set at £12,000, meaning anything above that amount must be held in stocks and shares to remain free of tax. Savers over the age of 65 will still be able to put up to £20,000 in a cash ISA each year.
“The chancellor is trying to push more people towards investing, but cutting the cash ISA limit is not the way. Cash has its place in a financial plan and we may now see an increase of cash in stocks and shares ISAs, which isn’t their purpose,” Steve Owen, head of proposition (EMEA), Morningstar Wealth, said.
“Focusing the solution on encouraging higher levels of investment exclusively on those accumulating below the age of 65 bypasses the opportunity for those with larger amassed pots. The age complexity coupled with the definition of ‘cash’ adds additional layers, and therefore friction for all,” he added.
Rachel Reeves Hikes Savings Tax Rates
While fewer than 10% of savers use the full £20,000 allowance, that figure rises dramatically for those on higher incomes.
Rachel Reeves’ cut to the overall allowance means more savers and investors will pay tax on cash and dividends. Because of the budget changes announced, they will pay more of it.
Savers still have an allowance of up to £1,000 before they pay tax, but from the 2027/2028 tax year, the basic rate of savings will be increased by two percentage points to 22%, while the higher rate will be increased by two percentage points to 42%. The savings additional rate will be increased by two percentage points to 47%.
Dividend Income Taxes Raised at the Budget
Another significant change came in the form of an adjustment to the income tax due on dividend income. From next April, the basic rate of dividend tax will be increased by two percentage points to 10.75%, while the higher rate will be increased by two percentage points to 35.75%. The additional rate will remain unchanged at 39.35%.
This will increase the tax burden for investors who but income-paying stocks outside ISAs, as well as small-business owners who pay themselves dividends.
Mark Preskett, senior portfolio manager at Morningstar Wealth, said the UK dividend tax hike is “a clear disincentive for stocks”, especially given the UK stock market’s strong dividend-paying history. He also noted the lack of “specific UK equity incentives within ISAs” especially given Rachel Reeves’ desire to increase stock market investing.
Dan Coatsworth, head of markets at financial platform AJ Bell, said the dividend tax rise is a mixed message from the chancellor.
“For a government desperate to encourage more people to invest their money rather than hide in cash, raising taxes on dividends is an odd move to take,” he said.
“Dividends function as rewards to compensate investors for the risk of putting their money in the markets. Losing more of that reward to the taxman is deeply frustrating to the investor. [...] Prioritizing tax wrappers such as ISAs or pensions allows investors to keep the full amount of any gains or income,” he added.
Inheritance Tax Changes Explained
Another policy change expected to hit affluent Britons involves inheritance tax, which is currently paid by less than 5% of estates.
For many wealthy families expecting serious changes to the UK’s inheritance tax “gifting” rules, the absence of any restrictive measures in Rachel Reeves’ speech was a positive surprise. Financial advisors are still busy preparing for changes in 2027 announced at the 2024 Autumn Budget, when private pensions were brought “in scope” of IHT.
“Based on our conversations, pensions and inheritance tax continue to weigh on clients’ minds,” said Warwick Bloore, senior specialist at Vanguard. “Doubtless, advisors are continuing to work strategically with their clients on their gifting plans, especially as the rumored changes didn’t happen.”
However, Rachel Reeves is still making smaller changes to this regime, at least one of which affects the way gifts are given.
The IHT nil-rate bands, including the combined allowance for the 100% rate of agricultural property relief and business property relief of £1 million, will now stay fixed for an additional year, ending April 2031, while the £1 million figure will be transferable between spouses and civil partners. Additionally, IHT business property relief will be restricted to 50% for shares quoted on recognized stock exchanges, including London’s Alternative Investment Market.
There were also measures to prevent IHT avoidance, including agricultural property held via non-UK entities.
What Changes Were Made to VCT and EIS Reliefs?
Perhaps the most significant change relevant to entrepreneurs, business owners, and angel investors, came in the form of a reduction in venture capital trust (VCT) income tax relief to 20% from 30%, which will come into effect from April next year.
However, the scope for company inclusion within VCTs and Enterprise Investment Schemes (EIS) will increase so that shareholders can remain invested in companies’ growth within their wrappers for longer. Commentators are divided over whether these budget changes offer clear incentives for risk-taking at the startup phase.
“Changes to tax relief levels on these specialist schemes have a big impact and Rachel Reeves does not appear to have looked at the history,” said Jason Hollands, managing director of wealth management firm Evelyn Partners.
Autumn Budget Hits UK Landlords Too
The Autumn Budget brought notable changes to property taxation, including a “mansion tax” based on a “high-value council tax surcharge” for homes worth over £2 million. This levy will start at £2,500 and increase to £7,500 for properties worth more than £5 million. This is in addition to existing council tax charges by councils. The changes will come into effect in April 2028, so homeowners have time to make decisions.
In a note after the budget, Morningstar DBRS said: “As a result, we would expect a 5% to 10% correction in the prices of high-value properties and some impact on properties below the thresholds.”
Landlords were also targeted by the budget. From April 2027, there will be separate tax rates for property income above £1,000. The property basic rate will be 22%, the property higher rate will be 42%, and the property additional rate will be 47%.
“The buy-to-let sector faces a ‘perfect storm’, and the inevitable result will be a contraction in rental supply and a subsequent spike in rental prices,” Morningstar DBRS added.
James Gard contributed to this article.
