Well we sat through the 2025 Budget so you didn’t have to. The event itself was a damp squib in the end anyway, as the Office for Budget Responsibility accidentally leaked the contents before Rachel Reeves addressed Parliament. That was an extraordinary error and you must assume that the unemployment figures rose by at least one civil servant on budget day.
We are only going to cover the key tax raising measures in this blog, as there is plenty of better economic analysis elsewhere.
Income Tax on passive investments – April 2027
Earlier this year the well regarded Resolution Foundation published a proposal that the Chancellor reduce National Insurance by 2% and increase the Basic Rate of Income Tax by 2%. This seemed like a fair measure as it would be broadly net neutral for employees but would increase tax on the income of pensioners and those with passive investment income such as landlords and investors. National Insurance is just another Income Tax and it is no longer ringfenced to pay for anything specific, but goes into the general pot of government spending. Broadening the Income Tax base made sense.
Did the Chancellor follow this sensible proposal?
No, instead she left National Insurance alone and just added 2% to the basic rate and higher rate of income tax for investors (meaning increased tax on cash interest, share dividends and rental income). Our tax system is already overly complex and this change just adds to this complexity by introducing five new rates of income tax for individuals, accountants and financial advisers to contend with. The new rates will be 22%, 42% and 47% on interest/rent and 10.75% and 35.75% on dividends (clear?).
Simplification of our tax system makes it easier for individuals to understand what they owe, reduces mistakes on tax returns and reduces the need for expensive tax advice. As we have said before it is still such a shame that the previous government abolished the Office for Tax Simplification (or OTIS*1 as only we affectionately called it).
High Value Council Tax Surcharge – April 2028
It is unarguable that the UK’s Council Tax system is ridiculous. It was started in 1993 and was based on 1991 house prices. The are some low value homes outside of the South East of England paying more in Council Tax than mansions in Mayfair. The system needs complete reform and whilst we are at it, Stamp Duty on property purchases needs tackling at the same time. A revaluation of property prices in the Council Tax system and replacement of Stamp Duty with a Land Value Tax would both be worthwhile reforms. The Institute of Fiscal Studies have proposed both and have some very good video explainers on tax reform.
Did the Chancellor follow these sensible proposal?
Nope, instead we have the catchy HVCTS. This is a tax of £2,500 per year on homes worth between £2million-£2.5million, £3,500 from £2.5million-£3.5million, £5,000 from £3.5m-£5million and £7,500 on homes worth £5million+. It will be collected as part of the process of collecting Council Tax. The government’s Valuation Office will be expected to identify and value homes worth more than £2million and then complete a revaluation exercise every five years.
Expect lots of fights with homeowners claiming properties are only worth £1.95million and then repeat that at each valuation level. This kind of cliff edge tax always leads to fights with taxpayers. It will be particularly pronounced where a property hasn’t been bought or sold for years or even decades and therefore the valuation can be questioned.
Electric Vehicle Excise Duty – April 2028
20% of new cars are now electric and so over time the government faces lower and lower tax income from car drivers.
It was perhaps therefore inevitable that the UK would start to move from tax on fuel to tax per mile driven.
The 2025 budget introduced this with a rate of 3p per mile drive for electric cars and 1.5p per mile for plug-in hybrids.
So an electric car owner driving 10,000 miles per year will pay £300 per year. It seems fair for drivers to pay towards road infrastructure in accordance with their use.
The devil as always is in the detail, with the government expecting drivers to estimate mileage a year in advance and then pay monthly. MOTs will reconcile these numbers each year and new mini-MOTs will be introduced for new cars (which are currently exempt from MOTs).
The way the rules are currently proposed, when you buy a second hand electric or hybrid, you will be buying with a surplus or deficit of mileage payments. This will add a huge amount of complexity to the buying/selling system.
Salary Sacrifice Pension Tax Relief Cap – April 2029
Salary sacrifice is a very cost effective way of buying a bike, an electric car, a pension and a multitude of other benefits (including advice). Your employer reduces your gross salary and you benefit from both the Income Tax and National Insurance saved. This can mean a discount of 77% for some employees in England and Wales (60% Income Tax, 2% employee National Insurance and 15% employer National Insurance) and even more in Scotland where Income Tax is higher.
This is a recognised tax scheme offered by the government as an incentive to buy certain products and services which they believe are good for employees. The proposal is that the National Insurance benefits will now be capped for pension contributions over the level of £2,000 per year. Given that the annual allowance for pensions is £60,000 per year, this is a huge tax increase for some employees.
How HR, payroll and pension providers will handle this increased complexity is anyone’s guess. The best hope seems to be that the measure never makes it into law given how far into the future it is planned for.
Was there any good news on tax?
Well yes, a bit.
The 2024 Budget introduced a limit of £1million per person for Business Relief and Agricultural Relief. This led directly to the farmer protests that are going on to this day. You can claim both reliefs and so a farming family could (in theory) pass on a farm worth £4million without paying Inheritance Tax IHT (and the rate of IHT above this level plus the nil rate band would only be taxed at a rate of 20% instead of 40%).
One wrinkle in the new rules was that this per person allowance wasn’t inherited by a spouse on the first death.
The 2025 budget has amended this from April 2026 and now this allowance will be inherited by a spouse after the first death. Farming couples and married couples using Business Relief investments will no longer have to make complex provisions on first death for Relieved assets to pass on to direct descendants.
This was one welcome simplification.
So in conclusion, if they are right for you think about maximising VCT investments in 25/26, maximise salary sacrifice pension contributions between now and 29/30, if right for you invest in Business Relief and consider an electric car.