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The Budget 2025 has landed – and frozen thresholds and new charges mean many households will feel the pinch.
As well as stealth taxes, pension contribution changes and mixed news on motoring costs, there's some better news in the shape of fare freezes and energy bill relief. Here’s what you need to know about the measures that could shape your finances for years to come.
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Rather than increasing the rate of income tax – which had been rumoured in the run-up to the Budget – the government has instead decided to freeze income tax thresholds for a further three years. It doesn’t sound dramatic, but it could make a bigger difference to your income than many of the other changes in this Budget.
The tax-free personal allowance will remain at £12,570 until 6 April 2031 for England, Wales and Northern Ireland. Higher-rate tax will kick in when income exceeds £50,270 and additional-rate tax will apply on income over £125,140. Different rates and thresholds apply in Scotland.
The freeze in income tax thresholds is expected to raise around £8 billion a year and will mean that more people than ever are paying income tax - around 73% of the over-16 population by 2030/31. This is up from 59% in 2020/21. To put it into context, the tax threshold freeze means that someone with an income of £50,000 will pay £9,512 in income tax, which is an increase of £1,247 compared to if the bands were allowed to increase in line with inflation.
People whose only income is the full new state pension were already expected to start paying income tax from 2027/28. The continued freeze means that the amount of income tax they pay on their pension is likely to rise each year and that some of those who do not get the full new state pension, or get lower levels of the old-style pension, are likely to start paying income tax too.
Jason Hollands, managing director of Evelyn Partners, said: “This is a massive income tax rise by stealth. The power of this policy to increase the income tax and national insurance burden over the years is really quite eye-watering.
“At the start of the century, only one in 10 taxpayers were subject to higher-rate tax. However, we are now in a position where a fifth of taxpayers are paying the two highest rates of tax, which makes a mockery of the idea that these quite onerous marginal rates should be reserved for the nation’s “high earners”. The numbers exposed to the highest rates of tax will soar to nearly a quarter by 2030.”
Earlier this week, modelling from pensions consultancy LCP suggested that if the chancellor increased the freeze on thresholds by two years (not the three that has since materialised), as many as 10 million pensioners would be paying tax on income by 2030. This is up from 8.7 million today.
Caroline Abrahams, charity director at Age UK, said: “The government’s decision to freeze the income tax personal allowance for a further three years will drag more older people into paying income tax, including some on low and modest incomes who need all the help they can get to sustain a decent standard of living at a time when prices for essentials are constantly rising. The announcement is deeply regrettable for this reason, made worse by the fact it is for a whole three years, even if its impact may in part be offset by the rise in the state pension as a result of the triple lock – a policy that is more important than ever for pensioners now.”
Figures published by LCP in May this year found that the number of pensioners paying tax at 40% or above had already doubled in four years to over one million.
Elsewhere in the Budget, the chancellor also announced a raft of tax increases on savings interest and property.
Levies will be removed from household energy bills, saving families an average of £150 a year, according to the government (poorer households could save as much as £300).
The freeze on prescription charges will continue, keeping costs at £9.90 per item in England.
Regulated rail fares in England will be frozen from March 2027 for the first time in 30 years. The current bus fare cap – of £3 per single journey – will remain in place until March 2027 and applies to most journeys in England.
The chancellor confirmed that the state pension will rise by 4.8% in April 2026. This will see pensioners that claim the full new state pension benefit from a further £575 a year. Although welcome, the increase means pensioners will soon start having to pay tax on their state pension.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The freeze on income tax thresholds means it is highly likely that the full new state pension will breach the threshold for basic-rate tax in 2027. It does mean that those who are solely reliant on it will need to pay tax and this may come as an unexpected shock.
Reeves announced that the government is looking at how to ease the administrative burden for those whose only income is the basic or new state pension. This will hopefully save them from having to pay tax via self-assessment from 2027-28, assuming the full state pension exceeds the personal allowance from that point. The government is exploring the best way to achieve this and will set out more detail next year.
Caroline Abrahams, from Age UK, said: “The announcement that the government will explore ways of ensuring those who receive only the old basic state Pension or the new state Pension do not have to submit a simplified tax return is however a welcome recognition that older people who are digitally excluded and on a low income would be likely to struggle to comply with this process. We are keen to hear more as simply sending older people a tax bill and expecting them to pay up on demand would be unthinkable.”
There will be no reduction to the amount of money that can be taken out of your pension tax-free. In the run-up to this Budget, and last year’s, there was a widespread fear that the current cap worth £268,275 could be slashed to £100,000, prompting thousands of over-55s to take money out of their pensions before they needed it.
Although tax relief on personal payments into pensions will remain unchanged, there was bad news for those using salary sacrifice to pay into their workplace pension – particularly those that want to pay bonuses into their pot in the run up to retirement. From April 2029, the amount of money that can be paid into a pension using salary sacrifice will be capped at £2,000 a year.
Salary sacrifice is a tax-effective way to contribute to a pension. By exchanging some of your pre-tax salary for an increased employer pension contribution, employees pay less national insurance and either see more money go into their pension tax-free, or get an increase to their take-home pay (depending on the arrangement). It also saves on employer national insurance contributions.
Alex Edmans, product director at Saga Money, said: “It’s positive to see the commitment to the Triple Lock, meaning that the state pension is set to increase by more than inflation next April, giving many pensioners an extra £500–£550 per year. However the cap on tax-efficient pension contributions via salary sacrifice could discourage saving for retirement, especially for those still working.
“We recognise that people over 50 rely on careful saving or a mix of savings and pensions for retirement income. We believe it’s essential that retirement saving remains affordable and urge those affected to review their pension plans now to understand what this news means for their long-term income security.”
There was relief all round that there weren’t any major changes to inheritance tax (IHT), following last year’s announcement that pensions would fall into the scope of the death levy from 2027.
In the run-up to the Budget, there had been speculation that gifting rules could change.
But there are still some points to note:
It was heavily rumoured that a ‘mansion tax’ was on the cards in the Budget. This has now been officially announced, framed as a ‘high-value council tax surcharge’ (HVCTS) which will kick in from April 2028.
Under the rules, anyone owning a residential property in England valued at £2m or more will become liable for an additional annual charge on top of their existing council tax. The surcharge will be structured in tiers based on property value. Homes in the first band, valued between £2 million and £2.5 million, will face an annual charge of £2,500, while properties worth over £5 million will incur a yearly levy of £7,500. These amounts will be adjusted over time to account for inflation.
The government said that fewer than 1% of properties in England are expected to be above the £2m threshold.
Alex Edmans, product director at Saga Money, said: “This is expected to raise several hundred million pounds and will apply to more than 100,000 households nationwide. We recognise that some homeowners over 50, particularly those who are asset-rich but cash-poor, may feel uncertain about how this change affects their future plans. We encourage anyone affected to review their financial position, seek professional guidance, and consider how the new tax may influence decisions around staying in, selling, or passing on their home.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “While a ‘mansion tax’ may be popular among Labour backbenchers, it will be difficult and time-consuming to implement, rather than a quick fix to the shortfall in the country’s finances. Properties will need to be valued and then homeowners are likely to challenge those valuations.”
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