Budget 2025 - A summary of the main personal tax announcements and what they mean for you

We detail some of the key tax measures from Budget 2025, along with our initial reactions below. We also summarise some of the other announcements most relevant to lower income taxpayers at the end.

Income tax thresholds frozen

The Chancellor announced that the current freeze on income tax thresholds would continue until April 2031. The freeze was not unexpected and had already been set to continue until April 2028. You can read our reaction to this announcement in our press release. 

Who is affected?

The continued freeze on thresholds results in fiscal drag, meaning more taxpayers on lower incomes are being brought into tax or have to pay more tax. A higher number of middle-income taxpayers are also likely to be brought into higher rate tax for the first time.

According to calculations by the Office for Budget Responsibility, almost one in four taxpayers will pay some of their tax at the higher rate by 2031. 

What does this mean for me?

The freeze means that if you receive pay rises in the coming years, you may find that you will take home less of that extra income than expected.

The freeze will also impact you if you are a pensioner receiving the full state pension, as we expect the full new state pension to exceed the personal allowance from 2027/28 onwards. See our state pension heading below for information about a possible further measure that may ease this tax burden – though the details at this stage are very limited. 

What else do I need to know? 

The freezing of income tax thresholds can also impact other reliefs and allowances. For example, if you will be entering the higher rate tax band for the first time, you may no longer be eligible for the Marriage Allowance.

It’s also important to note that your personal savings allowance may also be reduced from £1,000 to £500 once you start to pay higher rate tax. With changes also announced to cash ISA limits – the amount that can be saved in a cash ISA is being reduced from £20,000 to £12,000 a year for under-65s from April 2027 - more people may find themselves paying tax on their savings interest. 

State pension

The Chancellor confirmed that from April 2026, the basic and new state pension will increase by 4.8% in line with earnings growth under the ‘triple lock’ guarantee. The annual, full, new state pension will increase by around £575 to £12,548 (approximately £241 per week). 

Who is affected?

People who have already reached state pension age or will do so before 5 April 2027, and are eligible for state pension, will benefit from the increased weekly state pension rates during the 2026/27 tax year. More information on the state pension can be found in our guidance. 

What does this mean for me? 

For tax year 2026/27, if your only income is the standard amount of the new state pension, you will have total annual income of around £12,458. This is within the tax-free personal allowance of £12,570, therefore you will have no tax to pay on your pension income. However, if you receive the basic and additional state pension, you may already have annual pension income in excess of the personal allowance and therefore have a tax liability to pay. This may also be the case if you have income from other sources such as a personal pension, savings or property.

The tax liability on your state pension is usually collected through an adjustment to your PAYE tax code (where there is a PAYE income source, such as employment or personal pension income), or through HMRC’s simple assessment process which requires a tax payment after the end of the tax year. 

What else do I need to know? 

Due to the ongoing freeze in the personal allowance, the annual, full, new state pension is creeping ever closer to the level at which income tax is due. Under the triple lock guarantee, the new state pension is set to increase by at least 2.5% in 2027/28 - to approximately £12,860. This means that many pensioners will have state pension income in excess of the personal allowance for the first time from tax year 2027/28.

In the Budget, the government confirmed a commitment to “ease the administrative” burden for pensioners whose only income is from the basic or new state pension “so that they do not have to pay small amounts of tax via Simple Assessment from 2027-28 if the new or basic State Pension exceeds the Personal Allowance”.

Following the Budget, the Chancellor was interviewed by Martin Lewis on 27 November, and appears to have suggested that this will mean tax is simply not collected in cases where a person’s only source of income is the state pension. However, there is very little information on what this means and how this will work. For now, we will have to just wait and see…

Increases to tax rates for property income, savings and dividends

There was much speculation prior to the Budget about income tax rates, with rumours suggesting an increase in income taxes for working people. In the end, the rate of income tax was not increased for earnings. However, there were increases announced to the rates of income tax for dividends (from April 2026 onwards) and also for savings and property income from April 2027.

Per the Budget document, this reflects the fact that income from those sources faces no equivalent of National Insurance that employees pay.

Who is affected?

These measures will affect landlords, those with savings and investments, as well as people who work through their own limited company who pay themselves in dividends.

The changes to property income rates will apply in England, Wales and Northern Ireland. The government will engage with the devolved governments of Scotland and Wales to provide them with the ability to set property income rates in line with their current income tax powers in their fiscal frameworks. The changes to dividend and savings income rates will apply UK-wide as these rates are reserved.

What does this mean for me?

The new basic rates of income tax from April 2026 for dividends will be:

• Dividend income – 10.75% (up from 8.75%)

The higher rate will also increase to 35.75%, but the additional rate will remain at 39.35%.

The new basic rates of income tax from April 2027 on saving and property income will be:

• Savings income – 22% (up from 20%)
• Property income – 22% (up from 20%.)

The higher and additional rates will also increase by 2%. 

What else do I need to know? 

The Budget document also mentioned that there will be a change to the way the personal allowance is allocated across different sources of income from April 2027. This will mean the personal allowance must be used against non-savings income first.

Those with small amounts of income from these sources will continue to have access to tax-free allowances and wrappers like the property allowance and personal savings allowance and Individual Savings Accounts (ISAs). However, the amount that can be saved into a cash ISA (if aged under 65) is being reduced to £12,000 from April 2027.

The Budget document confirmed that the Starting Rate for Savings will be retained at £5,000 for 2026-27 and will stay at this level until 5 April 2031, allowing individuals with less than £17,570 in non-savings income (such as earnings from work, property income or pension income) to receive up to £5,000 of savings income tax-free.

Pension salary sacrifice

After much speculation ahead of the budget, it came as no surprise that a cap was confirmed on the National Insurance contributions (NIC) relief available on pension contributions made through a salary sacrifice arrangement. The delay of the introduction of this measure until April 2029 was, however, less expected. From this date only the first £2,000 of pension contributions made via a salary sacrifice scheme will be exempt from NIC. There will be no change to the income tax relief available.  

Who is affected?

The changes affect both employees and employers. Our colleagues in the CIOT issued a press release with more detail about the changes and potential impacts. 

What does this mean for me?

From April 2029 onwards, if you make salary sacrifice pension contributions of up to £2,000 you will not be impacted by these changes. Salary-sacrificed pension contributions above £2,000 per annum will be subject to NIC from April 2029. Ordinary employer contributions will be unaffected.

Basic rate taxpayer making £3,000 pension contributions via salary sacrifice

Sandra earns £30,000 and makes contributions to her workplace pension of £3,000 through a salary sacrifice arrangement. Until April 2029 she will receive full tax and NIC relief on this contribution.

From April 2029, the NIC relief will be limited to the first £2,000 and employee NIC will be charged on the excess amount of £1,000. Assuming the current employee NIC rate of 8% continues to apply, the additional NIC liability will be £80. In other words, Sandra’s annual take-home pay will decrease by £80. Her employer will have to pay employer’s NIC (currently 15%) on the excess amount of £1,000, i.e. £150 based on current rates. 

What else do I need to know? 

We do not yet have the details of how this measure will work in practical terms, for example for those who change jobs during the year or employees who have multiple jobs and make pension contributions via more than one salary sacrifice arrangement. 

Winter Payments

Eligible pensioners who receive a ‘winter payment’ (known as the ‘winter fuel payment’ in England, Wales and Northern Ireland, and the ‘pension age winter heating payment’ in Scotland) will have to repay it in full if their income exceeds £35,000.  This measure has effect from the 2025/26 tax year onwards. It was confirmed in the Budget that this £35,000 income threshold will remain unchanged for the remainder of this parliament. 

Who is affected?

A winter payment of between £100 and £300 is usually made automatically to eligible pensioners unless they opt out. HMRC will take back the payment from anyone whose total taxable income is over £35,000. 

What does this mean for me?

If your income is over £35,000 and you receive a winter payment you will need to bear in mind that HMRC will take back the payment from you. The payment is collected by deducting it from your PAYE (employment or pension) income, otherwise by self assessment, if you complete an annual tax return. You can use HMRC’s calculator on GOV.UK to check whether your income exceeds the £35,000 threshold. 

What else do I need to know? 

If HMRC collects your winter payments through PAYE you will notice a reduction in your net income. Your 2025/26 winter payment will be collected from your 2026/27 PAYE income. However, your 2026/27 and 2027/28 winter payments will both be collected from your 2027/28 PAYE income. From 2028/29 your winter payment will be collected by PAYE in the year in which you receive the payment. 

Timing of collection of winter payment via PAYE

HMRC have provided the following information on GOV.UK to illustrate the impact of the timing of collection of the winter fuel payment in the years 2026/27 to 2028/29:

“For the 2026 to 2027 tax year, for a typical winter payment of £200, approximately £17 per month will be deducted from a PAYE customer. In the tax year 2027 to 2028, deductions will temporarily rise to approximately £33 per month for a typical payment of £200. This is because HMRC will be recovering payments for both the 2026 and 2027 winter payments in the tax year 2027 to 2028. This supports the transition to in-year recovery of payments, in line with normal PAYE practice. From the tax 2028 to 2029 onwards, deductions will return to approximately £17 per month.” 

Making tax digital for income tax and self assessment administration

There were several changes announced to the making tax digital rules, which are due to come in from April 2026, the most important being in relation to the new penalty regime. The government have announced that there will be a soft landing for penalties for late quarterly updates during the 2026/27 tax year.

It was also announced that self assessment taxpayers – so those who are not required to take part in making tax digital – will also be brought into the new penalty regime.

You can read our reaction to these announcements in our press release.

Several other small making tax digital changes were also included in the Budget, such as deferring the start date of making tax digital for some groups of individuals. We will provide more information on this in due course. 

Who is affected?

These announcements affect individuals who are required to take part in making tax digital from April 2026. Making tax digital for income tax will apply in stages, firstly to individuals who receive more than £50,000 gross income from self employment income and/or rental income (per the figures from the 2024/25 self assessment tax return). Under current plans, the rules will be extended to those with gross self-employment and/or property income of £30,000 from April 2027 and £20,000 from April 2028.  

What does this mean for me?

The new penalty regime for making tax digital works on the basis of penalty points being issued (similar to driving points), with a financial penalty issued after a certain number of points. It is therefore considered to be fairer than the current system of penalties for self assessment, when, for example, an automatic £100 late filing penalty is issued if you file your tax return even one day date.

Even so, the announcement means that those affected will not be penalised for failing to submit any of their quarterly updates during the first 12 months of making tax digital. This gives those individuals affected time to get used to the new regime and will be of particular help to unrepresented taxpayers who are grappling with the new system themselves. Penalties will still apply for failing to submit your end of year tax return and for late payment of tax. 

What else do I need to know? 

It is important to note that this soft landing currently only applies to those who are in making tax digital from April 2026 for the 2026/27 tax year. 

Any taxpayer who thinks they may be in making tax digital from April 2026 should submit their 2024/25 tax return as soon as possible, so they can determine whether they need to prepare for the new rules.

The Budget document contains details of two forthcoming changes to the self assessment tax return system.

The first is in relation to the penalties which apply for late submission of tax returns and late payment of tax for people outside making tax digital regime. From April 2027 these are to be brought in line with the simpler and fairer making tax digital penalty system (see above). This was something we recommended in a report published in October 2024, so we are very pleased that the government has taken this on board.

The second measure concerns payment of tax arising under self assessment. The Budget contained a brief reference to “more timely payment for self assessment”, indicating that self assessment liabilities will perhaps need to be paid ‘in year’ through PAYE rather than under the current payment pattern of a lump-sum due by 31 January after the end of the tax year (and possibly six-monthly payments on account where applicable). 

We will provide detailed information on both of these measures as soon as further information is made available.

And the rest…

Other notable announcements:

• Reassessing Carer’s Allowance overpayments caused by official error – The government will reassess Carer’s Allowance overpayments which were the result of incorrect operational guidance, as recommended by the Independent Review into Carer’s Allowance Overpayments. Department for Work and Pensions (DWP) will cancel existing debts or return previously collected debts to affected carers.
• Non-reimbursed employment expenses for homeworking – The government will remove the deduction from Income Tax for non-reimbursed home working expenses. Employers can still reimburse employees for these costs where eligible without deducting Income Tax and National Insurance contributions. This will be legislated for in Finance Bill 2025-26 and take effect from 6 April 2026.
• National Insurance contributions re-rating – The government will increase the Lower Earnings Limit (LEL) and the Small Profits Threshold (SPT) by the September 2025 CPI rate of 3.8% from 2026-27. For those paying voluntarily, the government will also increase Class 2 and Class 3 NICs rates by September CPI of 3.8% in 2026-27. The LEL will be £6,708 per annum (£129 per week) and the SPT will be £7,105 per annum. The main Class 2 rate will be £3.65 per week, and the Class 3 rate will be £18.40 per week. The government will legislate for this measure in affirmative secondary legislation in early 2026 as part of the annual setting of National Insurance contributions limits and thresholds, as is standard practice.
• Qualifying Care Relief - The government will uprate Qualifying Care Relief, the amount of income tax relief available to foster carers and shared lives carers, by the September 2025 CPI rate of 3.8%. This will be legislated for in Finance Bill 2025- 26 and take effect from 6 April 2026.
• Married Couple’s Allowance and Blind Person’s Allowance – The government will uprate the Married Couple’s Allowance and the Blind Person’s Allowance by the September 2025 CPI rate of 3.8%. This will be legislated for through a Treasury Order and take effect from 6 April 2026.
• Student loans: Freezing Plan 2 repayment threshold for three years from April 2027 – The repayment threshold for Plan 2 student loans will be frozen at £29,385 for three years from April 2027.
• Help to Save Reform – The government will make the Help to Save scheme permanent and, from April 2028, will expand eligibility to include all Universal Credit claimants who receive the child element, the caring element or both.
• National Living Wage and National Minimum Wage increases – From 1 April 2026, the National Living Wage will increase by 4.1% to £12.71 per hour. The National Minimum Wage for 18-20 year olds will also increase by 8.5% to £10.85 per hour and for 16-17 year olds and apprentices by 6.0% to £8.00 per hour. The accommodation offset will increase by 4.1% to £11.10 per day.
• Lots on universal credit – check back for updates!