Optimise your affairs
The headlines around November’s Budget are subsiding, and everyone has had time to reflect. Many are considering the steps they might take next to preserve and grow their wealth – and keep tax bills to a minimum. Failure to keep an eye on the small details can have damaging consequences – just speak to Richard Hughes, the recently departed head of the Office for Budget Responsibility.
The 2025 Budget was not as bad as feared, and the Chancellor was able to build up about £20bn of wiggle room for herself in the years ahead. This sounds like a lot, but it represents a reserve of only about 1.5% of total spending, and this can disappear in any number of ways if spending or growth shifts unexpectedly. For instance, should the government bring forward its promise that defence spending will equal 3% of GDP, this would diminish appreciably. If the wiggle room does disappear, then the Government could come back to tax the wealthy next year, so it is always best to plan for the worst while hoping for the best.
The biggest money-raiser in the Budget was the freezing of the bands for Income Tax and National Insurance. This means that promotions and pay rises will drag more into the higher or the additional-rate bands much quicker than they otherwise might have. Moving up into a higher tax band can still be avoided by careful planning and salary sacrifice arrangements, but of course salary sacrifice arrangements have been made less attractive in this year’s Budget. There are a number of ways to mitigate a rising Income Tax liability, the most straightforward of which is holding income-generating assets in pensions and ISAs, rather than General Investment Accounts. For those with a higher risk appetite, Venture Capital Trusts offer up to 30% income tax relief on investments up to £200,000 per year. However, this is due to fall to 20% in April 2026.
The big talking point this year was the attack on pension contributions made via salary sacrifice. Starting in April 2029, salary sacrifice arrangements over £2,000 will be subject to employers’ and employees’ National Insurance. Salary sacrifice arrangements are a very popular means for slightly older employees to top up their pensions before retirement, as well as for managing movement between tax bands. This change makes salary sacrifice arrangements less attractive to both employees and employers.
If there is an upside to the changes to salary sacrifice, it is that they will not be introduced until April 2029, which gives you plenty of time to plan and, if necessary, front-load the pension contributions you make via salary sacrifice. Between now and then, some employees may be able to persuade their employer to change their terms and conditions of employment – for instance, by asking for greater employer pension contributions to compensate for their higher tax charge.
In another change, the Budget introduced a 2% additional charge on rents, dividends and interest income. Some suspected that rental income could be subject to National Insurance, so a 2% additional tax looks like a reprieve. However, if more money needs to be raised in future budgets, these sources of income could be hit further, much as “unearned income” was in the past by earlier Labour governments.
In the past, many savers looked at renting out a second property as part of their retirement income. The abolition of the furnished holiday letting rules last year, the requirements of Making Tax Digital on landlords, the Renters’ Rights Act 2025, and this 2% tax, make renting a second property much less attractive now. Rental profits will now be taxed at 22%, 42% or 47% depending upon your tax band.
For dividends, the ordinary rate will rise from 8.75% to 10.75%, and the upper rate from 33.75% to 35.75% from April 2026. The additional rate will remain unchanged at 39.35%. Interest outside a tax-protected account at the basic rate will be taxed at 22%, the higher rate at 42%, and the additional rate at 47% from April 2027, a 2% increase across the board. At the margin, this may make taking dividends rather than salary less attractive to small company owners, but it does not change the overall calculation. Interest will also be charged at a higher rate, but again, this probably does not change the underlying calculation – those that need to hold cash will still do so, the tax will simply be more burdensome.
An important, and related, change was to how one pays into an ISA every year. The Lifetime ISA was abolished, to be replaced by something new in the future, and you used to be able to pay £20,000 into your ISA and invest it, within reason, how you liked. The ISA maximum remains at £20,000 but, if you are under 65, only £12,000 of that can go into cash and related investments, with the balance going into “growth” investments. If you are over 65, you can still put your entire £20,000 into a cash ISA. This is not a tax-raising step by the government, but an attempt to get people to invest in higher-reward investments like equities or even venture capital. This is often described as encouraging long-term investment, but it does perhaps reduce the ISA as a tax-efficient way to hold cash for an event in the not-too-distant future, such as a wedding, a house purchase, or school fees.
Alongside these changes, it is worth remembering that Junior ISAs (JISAs) remain untouched. You can still contribute up to £9,000 per child each tax year, with all income and gains sheltered from tax. For parents and grandparents looking to build long-term funds for education costs, a first home, or simply to give children a strong financial start, JISAs continue to offer one of the most efficient and flexible tax-free savings vehicles available. They also allow families to make use of allowances across generations, helping to counteract the impact of frozen tax bands and Inheritance Tax on household finances.
Another tax rise that is on a relatively long lead time is the High Value Council Tax Surcharge, or the so-called “mansion tax”. This will apply to all properties with a value greater than £2m from April 2028. There is not a lot of planning that can reduce this tax burden other than downsizing or moving abroad. The surcharge will range from £2,500 a year to £7,500 a year depending upon the value of your home.
Overall, the Budget largely reinforces the importance of good long-term tax planning rather than radically reshaping the landscape. While Income Tax, National Insurance, ISA rules, and investment-related taxes all attracted attention, it is notable that neither Capital Gains Tax nor Inheritance Tax were touched. This may offer short-term reassurance, but with the Chancellor holding only a modest fiscal buffer, these areas could easily be revisited in future Budgets if revenues fall short. As ever, the most effective approach is to make full use of existing allowances and reliefs while they remain available, ensuring your financial arrangements are resilient to any future policy shifts.
If you would like to review how best to protect and grow your wealth in light of these changes, and to take advantage of the many opportunities that still exist, please don’t hesitate to get in touch.
Please be aware that the value of investments may go up or down and you may receive back less than you invested originally. Past performance is not a guide to the future.
This document contains general information only and does not provide any advice or guidance specific to your personal circumstances.
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