How the Budget affects your income
Frozen Income Tax Thresholds:
The points at which you start paying income tax (20%), the higher rate (40%), and the additional rate (45%) will be frozen until April 2031. This means that as wages naturally increase, more people will be pulled into higher tax brackets, a process known as “fiscal drag”. Impact on take-home pay: For many, a pay rise will not feel as substantial as it seems, as a larger portion of it will be taken in tax.
New higher-rate taxpayers:
It is estimated that this measure will create almost a million new higher-rate taxpayers by 2029–30.
National Living Wage Increase:
For low-income earners, the National Living Wage will increase to £12.71 per hour for eligible workers aged 21 and over from April 2026. This is expected to provide a significant boost to the lowest-paid workers.
Pensions Salary Sacrifice Capped:
From April 2029, the National Insurance (NI) relief on salary sacrifice pension contributions will be capped at £2,000 per year. Any contributions above this threshold will become liable for NI. What it means: For those using a salary sacrifice scheme to boost their pension savings, this change will reduce the tax-efficient benefit for contributions over £2,000. It’s an issue more likely to impact higher earners.
Higher Taxes on Savings and Dividends:
Starting in April 2027, the tax rates on income from savings, property, and dividends will increase by 2 percentage points. This will affect anyone with savings or investments outside of an ISA.
Broader impact on working families
Scrapping the Two-Child Benefit Cap:
The controversial two-child limit on Universal Credit and Child Tax Credits will be removed from April 2026. Impact: This measure is aimed at reducing child poverty and will benefit around 560,000 families by an average of £5,310 per year.
Electric Vehicle (EV) Mileage Charge:
If you own an EV or a plug-in hybrid, you will face a new charge based on mileage from April 2028. Cost: For a fully electric car, the charge will be 3p per mile, potentially costing an average driver around £255 per year.
Why it’s happening: This is intended to recoup lost fuel duty revenue as more people switch to electric cars.
ISA Reforms:
The annual tax-free cash ISA limit will be reduced from £20,000 to £12,000 for individuals under 65, starting in April 2027. Impact on savers: This encourages people to move more of their money into stocks and shares ISAs instead of cash. Over-65s are exempt from this change.