Speculation was rife in the lead up to the second budget of Rachel Reeves’ tenure as chancellor. Anaemic growth and the concessions in the Welfare Reform bill meant it was clear that the Treasury would need to raise more in tax.
Yet in the aftermath the story is at least as much about what wasn’t in the budget as what was included.
Successive Chancellors have decided that, as far as tax raising measures are concerned, the path of least resistance is to freeze thresholds and this was largely the story again. However, there were some changes, for example to cash ISA allowances, pensions salary sacrifice and property taxation, that were of note.
Reeves intends to use the additional tax revenue for two purposes: firstly, to provide greater headroom for her to meet her fiscal rules and secondly, to allow her to scrap the two-child benefit cap. The first measure has been met with approval by bond markets, the second, with approval by Labour backbenchers.
A notable omission was any dramatic measures to stimulate growth. There will likely be some disappointment within the business community at this. However, this will be offset somewhat by the absence of any significant tax increases on business.
So, what were the main budget announcements?
- Income tax band freeze extended to 2030. Rachel Reeves has chosen to extend the freeze on income tax bands beyond the 2028 date set by Jeremy Hunt, itself an extension of the 2026 end date originally set by Rishi Sunak in the wake of the Covid pandemic. The median taxpayer can expect to pay around £1,000 more in tax by 2030 as a result of this measure.
- Pensions Salary Sacrifice. This applies to many working people who are contributing to money purchase pensions through their employer. A tax efficient option is to reduce your salary by the amount you want to contribute to your pension, your employer then makes the payment on your behalf. This saves both employee and employer National Insurance contributions. From 2029, salary sacrifice contributions will only be free from employee NI up to £2,000 a year.
- ISA Allowances. It is important to note that these changes only apply to investors who will be under 65 years of age in 2027 and only affects new contributions. From April 2027 the maximum under 65s will be able to contribute to a cash ISA will be £12,000. The overall limit is still £20,000 so, if £12,000 is paid into a cash ISA, £8,000 can still be contributed to a stocks and shares ISA.
- Electric car charge. From 2028, there will be a charge of 3p per mile for electric vehicles. It seems that drivers will be expected to estimate their milage at the start of a given year, the tax will then be adjusted at the end of the year based on actual miles driven. It remains to be seen how easy this will be to enforce and administer.
- Council Tax Surcharge for “High Value” homes. From April 2028, owners of properties with a value greater than £2 million will pay a surcharge on the ordinary council tax rates. Properties will be valued in 2026. There will be tiers of surcharge with the highest charge being paid on homes valued at over £5 million. However, the £2 million threshold is a “cliff edge” meaning that a property valued at just under £2 million will have no surcharge to pay.
As usual, if you have any questions about what was in the budget or any other financial planning questions, please contact your adviser or call the office on 01202 861500.