Budget 2026: A summary of the main announcements and what they mean for you

Income tax thresholds remain frozen

The personal allowance (the amount most people can earn before paying tax) remains frozen at £12,570 as have the main income tax thresholds. 

Who is affected?

Employees, pensioners, investors and others whose income may increase, particularly if their income is close to a tax threshold.

Note that the Scottish Government sets its own income tax thresholds for non-dividends and non-savings income which includes income from earnings, pensions and property. They have not yet confirmed their position for 2027/28.

What does this mean for me?

Even if your tax rate does not change, you can end up paying more income tax if your income increases but the tax-free personal allowance and other tax thresholds do not.

This is sometimes called ‘fiscal drag’. In simple terms, it means that as your income rises, a greater part of it may fall into the tax system or into a higher tax band. 

This can also impact on things like the personal savings allowance, as this may reduce upon moving into a higher tax band. 

Tax rates on savings and property income will increase

From 6 April 2027, the income tax rates applying to savings income will increase to: 

• 24% for basic rate taxpayers
• 44% for higher rate taxpayers
• 49% for additional rate taxpayers. 

These rates will apply across the UK. 

New rates of 24%, 44% and 49% will also apply to property income in England, Wales and Northern Ireland from 6 April 2027. In Scotland, property income rates are set in line with devolved income tax powers. They have not yet confirmed the position for 2027/28.

Note that the Chancellor only announced a two percent increase in this year’s Budget but this was on top of the two percent increase previously announced. 

There were no announced changes to income tax rates on earnings or dividends. 

Who is affected?

The savings changes could affect you if you receive taxable interest on savings held outside tax-free accounts such as ISAs.

The property changes could affect people who receive income from letting out property, including some people who might not think of themselves as professional landlords.

What does this mean for me?

The changes do not necessarily mean you will have tax to pay just because you receive savings interest or property income.

There are still tax-free allowances which may apply, depending on your circumstances. For example, the personal savings allowance and starting rate for savings can allow some people to receive savings interest without paying tax.

However, if you already pay tax on savings or property income, the higher rates could increase your tax bill from April 2027.

Trading allowance increased to £3,000

As set out in detail on GOV.UK, the government will increase the trading allowance from £1,000 to £3,000 from 6 April 2027. The self assessment reporting threshold for trading income will also increase to £3,000. 

Who is affected?

This could be important for people earning relatively small amounts from self-employment or casual activities. For example, it could apply to someone earning money from a small side business, freelancing, selling goods on a commercial basis or providing occasional services.

As the trading allowance is not prorated in years where businesses start or stop and can also be used as ‘partial relief’, it can also be used by those with larger amounts of income and/or lower levels of expenses. 

It is important to note that the concept of the trading allowance is not recognised by the Department for Work and Pensions - this means you cannot use the trading allowance when working out your income for Universal Credit.

What does this mean for me?

At present, the trading allowance is £1,000. The increase to £3,000 means that more people with relatively small amounts of trading income in a tax year, will no longer have income tax to pay on that income. It could also reduce the number of people with small amounts of trading income who need to report it through self assessment.

It is important to remember that the allowance relates to gross income before expenses, rather than profit. It can also be used as ‘partial relief’ meaning people with income above £3,000 will be able to make a fixed deduction of the £3,000 allowance using partial relief, rather than deducting their actual expenses. 

You should also be aware that sometimes it can be better to claim actual business expenses instead of the trading allowance. The right approach will depend on your circumstances. We explain more in our guidance. 

New Pension Tax Allowance

The government has confirmed a new Pension Tax Allowance from 6 April 2027. Its purpose is to prevent small income tax bills arising for people over state pension age whose total income (from any source) is no more than the value of the full new State Pension, which is £13,037 for 2027/28. 

The new allowance will operate as a tax reducer of £94 in 2027/28, and is tapered for those with total income slightly above the annual value of the new State Pension. No Pension Tax Allowance will be available where a person’s income is £13,319 or more.

The allowance will be temporary and is intended to apply in the 2027/28, 2028/29 and 2029/30 tax years. It will be uprated with the state pension triple lock in 2028/29 and 2029/30. 

A government explainer with examples and an FAQ is available on GOV.UK.

Who is affected?

The measure is aimed particularly at state pensioners whose main source of income is the full new State Pension and who could otherwise face a small income tax bill from April 2027. This is because the full new State Pension will be around £13,037 from April 2027, which exceeds the value of the tax-free Personal Allowance, which will remain at £12,570. 

However, the new allowance can be used by state pensioners who have total income from any source up to the relevant amount. In 2027/28, those with total income up to £13,037 will receive the allowance in full, and income exceeding this limit will see the allowance tapered away. Once total income reaches £13,319 in 2027/28, no Pension Tax Allowance is available. 

  Income from non-ISA savings and dividends are included when calculating ‘total income’, even if that income falls below the personal savings allowance or dividend allowance. 

What does this mean for me?

If you are eligible, the allowance could prevent you from having to pay a small amount of income tax simply because of the interaction between increases in the State Pension and the frozen personal allowance.

HMRC have confirmed the allowance does not need to be claimed and will be applied automatically.

We will provide more detailed information about how the allowance works before it comes into effect. For more information read our press release: Budget 2026: Pension Tax Allowance goes further than promised but is far from simple. 

Making Tax Digital – penalty easement extended 

The government has announced that late filing penalty easements for quarterly updates will be extended to those joining the Making Tax Digital (MTD) regime from April 2027. 

We explain more and set out some initial reactions in our press release: LITRG welcomes extension of Making Tax Digital penalty easement for next wave of taxpayers.

Who is affected?

Over 1 million taxpayers are expected to join MTD for the first time in April 2027. The next group will generally be individuals with qualifying gross income from self-employment and property exceeding £30,000 in the 2025/26 tax year. 

What does this mean for me?

The extension of the initial penalty easement (sometimes called a ‘soft landing’ on penalties) will give the next group of taxpayers more time to get used to the new system. This means those on lower incomes joining in April 2027 will receive similar ‘breathing space’ to those on higher incomes that entered MTD from April 2026. 

However, taxpayers will still need to comply with the underlying MTD requirements, including keeping digital records and submitting quarterly updates using compatible software. You can read more about these in our MTD information hub. 

VAT and PAYE payments by Direct Debit 

From April 2029, businesses and employers will be required to have Direct Debit arrangements in place for VAT and PAYE liabilities. 

However, HMRC have indicated a slightly more flexible approach than was set out in their original proposals, which responds to some of the concerns that LITRG set out in its consultation response. 

Who is affected?

This requirement will affect small businesses and employers, potentially including micro and accidental employers like care and support employers - subject to defined exceptions. 

What does this mean for me?

HMRC have confirmed that businesses and employers will remain free to pay using their preferred method up to a certain point, but that they will use the Direct Debit instruction to collect any balance left unpaid. 

HMRC has said it will work with stakeholders on the policy and implementation including what exemptions will be needed, how to encourage early take up of automated payments and what the consequences will be of continued non-compliance with paying accurately and on time. 

National Minimum Wage and National Living Wage

The National Living Wage will increase to £13.21 an hour from 1 April 2027. The National Minimum Wage will also increase to:

• £11.27 for those aged 18-20
• £8.31 for under 18’s
• £8.31 for the apprentice rate 

The official publication setting out the new rates and rationale for the increases can be found on GOV.UK. 

Who is affected?

Employees and those with ‘worker’ status who are entitled to the minimum wage. 

Note that some self-employed people can be indirectly impacted by increases to the minimum wage. This is because the artificial income figure sometimes used to work out a self-employed person’s entitlement to universal credit, known as the minimum income floor (MIF), is directly linked to the minimum wage. 

What does this mean for me?

If you are paid at or close to the National Living Wage or the National Minimum Wage, your minimum hourly rate should increase from April 2027.

An increase in wages can affect the amount of income tax, National Insurance and other amounts, you pay; and - if you claim means-tested benefits such as Universal Credit - the amount of benefit you receive. The exact effect will depend on your personal circumstances.

Carer’s Allowance – removal of cliff edge 

Further to last year’s review into Carer’s Allowance overpayments, which LITRG inputted to, the government has announced plans to change the way earnings affect entitlement to Carer’s Allowance.

Currently, carers can lose their entire weekly benefit if their earnings exceed the permitted earnings limit by just one penny. The earnings calculation allows deductions for tax, National Insurance, 50% pension contributions and certain other expenses, including those from employment. 

A taper will be introduced for earnings above the ‘Weekly Earnings Limit’, with the change planned within 2030/31, once a new IT system is in place.

Who is affected?

Carers in England and Wales who earn more than the Weekly Earnings Limit. This is currently equivalent to 16 hours at the National Living Wage.

What does this mean for me?

Under the planned change, carers will be able to increase their earnings without immediately losing their entire benefit – although it is worth saying that both sources of income are taxable.

This change will not happen straight away. More details are needed about how it will work before it starts. In particular, the new IT system that will automatically adjust payments in line with the taper will presumably depend on earnings information passing between HMRC and DWP. However, this information will not necessarily include all the expenses that carers can deduct when working out their earnings for Carer's Allowance purposes. There will therefore need to be a way for carers to provide details of relevant expenses, alongside reliable earnings information.

Effective coordination between HMRC and DWP will be important to ensure that the new system works accurately and that carers receive the correct amount of benefit.

Paying self assessment tax more regularly

Further to a consultation earlier this year, the government is proceeding with plans for some people who make self assessment payments on account, to make more regular payments during the tax year. Eligible taxpayers will also be able to choose to pay through PAYE. This will apply from April 2029.

Per the consultation outcome paper, HMRC will not proceed with making payment of self assessment tax through PAYE mandatory. This is something that LITRG called for in our consultation response. Our press release ‘Timely tax payment plans revised but cash flow concerns remain’ provides further comment. 

Who is affected?

This is potentially important for self-employed people and others who pay their tax through self assessment and have to make payments on account.

What does this mean for me?

Under the current system, payments on account are generally concentrated around particular payment dates (31 January and 31 July each year). Moving towards more regular payments could help some people spread the cost of their tax bills throughout the year, although it may also mean adjusting to a different payment pattern.

The change is not expected until April 2029 and important details still need to be worked out, so there is nothing you need to do right now. A GOV.UK factsheet is available for further information in the meantime. 

Mileage rates for cars and vans

The government is making permanent the increased statutory mileage rate of 55p per mile for the first 10,000 business miles in a tax year, which applies from 6 April 2026. The rate for business miles above 10,000 will increase from 25p to 35p per mile from 6 April 2027. 

Who is affected?

This is relevant to employees, like care workers, who use their own cars (or vans) for qualifying business journeys, and to employers who pay mileage allowances. It also affects self-employed people who use simplified mileage rates to deduct motoring costs when working out their taxable profits.

The government predict that 3 million people could benefit. 

It is important to note that the amounts that DWP currently use to calculate income and deductions for Universal Credit purposes may not align with HMRC’s new rates. 

What does this mean for me?

If you are an employee, your employer can pay you up to the approved amount without you paying income tax on the mileage payment. However, the tax rules do not require your employer to pay that amount. If your employer pays less, or nothing, you may be able to claim tax relief on the shortfall. 

Tax relief reduces the tax you pay; it is not a repayment of the full shortfall. You may not benefit if your income is too low to pay tax.

If you are self-employed and use simplified mileage rates, the higher rates can increase the deduction for qualifying business journeys and so reduce your taxable profits. They do not mean that HMRC pays you 55p or 35p for each mile. You can find some further insights in our press release from earlier this year, when the 55p increase was first announced.

And the rest…

There were many other announcements in the Budget. You can find the full paper on GOV.UK. 

Among those potentially relevant to lower income individuals include:

• the government will keep the cash ISA limit at £20,000 from 6 April 2027, rather than proceeding with the previously planned reduction; 
• National Insurance thresholds including the Lower Earnings Limit and Small Profits Threshold will increase for 2027/28, while other National Insurance limits and thresholds will remain at 2026/27 levels until 2030/31;
• from 6 April 2028, the government will remove the £2,500 self assessment threshold for employment expenses claims. Currently, employees claiming tax relief on more than £2,500 of qualifying expenses in a tax year must use self assessment. Removing the threshold will allow more employees to claim relief through PAYE without entering self assessment solely to claim expenses their employer has not reimbursed;
• payments made under the Electricity Bill Discount Scheme will be exempt from income tax, retrospectively from 6 April 2026. The Budget also included several measures aimed at reducing household energy costs.
• the government has extended the temporary 5p per litre cut in fuel duty and postponed the planned increase in fuel duty until 1 July 2027. 
• the government announced plans to extend parental support to additional parents, including some self-employed fathers, adopters in Great Britain and other partners who have previously missed out.
• for Universal Credit, the government is extending the £2,500 surplus earnings threshold for a further year from 1 April 2027. 
• A new measure to allow certain overpayments of child benefit to be offset against High Income Child Benefit Charge payments made in relation to that overpayment. 

Several Budget announcements will require legislation or further detail before they take effect. We will update our guidance as more information becomes available.