Chancellor Rachel Reeves’s second Budget was making headlines before she even stood up, thanks to an unprecedented “technical error” by the Office for Budget Responsibility (OBR) which led to documents being published early.
Thanks to that OBR leak, the press and other keen Budget watchers such as ourselves already knew the headline details: frozen tax thresholds and personal allowance, 2% increases in income tax rates for dividend, savings and property income, capping of NIC relief on salary sacrifice pension arrangements, the introduction of a mansion tax on homes valued at over £2 million and a pay-per-mile charge on electric vehicles.
With a bit of creative thinking, the Chancellor might argue that she has not broken the manifesto pledge not to increase taxes on “working people”. However, the combined effect of frozen thresholds and personal allowance alongside the scaling back of NIC-saving measures such as salary sacrifice will mean that workers will be paying more. It has been common practice for director shareholders to minimise their NIC and income tax liabilities by paying a nominal salary and extracting profits through dividends. The tax benefits of dividends have gradually been reducing over recent years, but the imposition of an additional 2% tax from 6 April 2026 on the basic and higher dividend rates may mean that owner managers need to revise their profit extraction policies.
On a more positive note, there was no change to capital gains tax rates, nor did the Chancellor choose to make any further significant amendments to the inheritance tax regime, beyond confirming that the nil rate band will remain fixed at £325,000 until 5 April 2031. The Chancellor has also relented slightly on her restrictions to agricultural and business property reliefs, and will allow any unused part of an individual’s £1 million allowance at 100% to be passed to a spouse.
The introduction of a mansion tax (the High Value Council Tax Surcharge) on properties valued at £2m or more in April 2026 is estimated to raise more than £400m a year when it comes into effect in April 2028. The additional charge will be collected alongside council tax, and will depend upon the value of the property with the most valuable homes (over £5m) paying an additional £7,500 per year. This annual charge will be increased by CPI inflation each year.
For businesses, the Chancellor announced the reduction of writing down allowance (WDA) rates on plant and machinery from 18% to 14% from April 2026. This applies to both companies and unincorporated businesses such as sole traders and partnerships, and will apply to expenditure falling outside the £1 million Annual Investment Allowance or (for companies only) the full expensing / 50% First Year Allowance rules. Expenditure on new leased assets will be eligible for a new FYA at the rate of 40%, but expenditure on second-hand assets and cars will be subject to the lower WDA rates. The special rate pool WDA rate of 6% remains unchanged.
The Chancellor appears to have moved away (for the time being, at least) from her threat to impose additional national insurance charges on partnerships and LLPs. The main change as far as NIC is concerned is the withdrawal of NIC relief on salary sacrifice pension contributions above £2,000 from April 2029. These arrangements, according to the Chancellor, were never intended to be as widely used as they now are. A slightly odd sentiment, given the percentage of the population who still need to be incentivised to save for their retirement.
The Chancellor describes her Budget choices as “fair and necessary”, saying that “ordinary people” need to “pay a little bit more”. Some may agree, but the unhappy statistic remains: we will have the highest tax burden as a percentage of GDP by 2030/31, and few will feel there is light at the end of the tax tunnel.
HIGHLIGHTS
Personal taxes
Income Tax (and National Insurance)
-
- Freezing of income tax thresholds: the personal allowance has been frozen at £12,570 since 6 April 2022. The current freeze was due to come to an end in 2027/28 but has now been extended until 5 April 2031. The basic, higher and additional rate bands will also remain unchanged until 2031, along with the thresholds for employer and employee national insurance.
- Minimum wage: the hourly rate for over-21s will increase from £12.21/hour to £12.71 from April 2026. Workers aged 18 to 20 will see an increase of 85p from £10 to £10.85.
- State pension: the triple lock remains intact, and the basic state pension will increase by 4.8% in 2026/27.
- ISAs: savers can only put up to £12,000 into cash ISAs tax-free each year. Over 65s will retain the full £20,000 allowance on a cash ISA.
Capital Gains Tax
-
- Employee Ownership Trusts (EOTs): Capital Gains Tax relief on sales to EOTs has been cut from 100% to 50%, altering succession planning for many owner-managed businesses from today.
Inheritance Tax
-
- The inheritance tax nil band rate will be extended until 2031.
- Agricultural Relief and Business Relief: following the consultation, the Chancellor has confirmed that any unused £1 million Agricultural Relief and Business Relief allowance for 100% relief will be transferable between spouses and civil partners if the first death is before 6 April 2026.
Employment Taxes
-
- Funding for Apprenticeships for under-25-year-olds will be free for small and medium enterprises
- From April 2029, pension salary sacrifice contributions will be capped at £2,000 a year for employee and employer contributions
Business
Business rates
-
- Corporation tax rates remain the same.
- There will be a new 40% first-year allowance from January 2026 for leased assets.
- Writing Down Allowances will be reduced from the main rate from 18% to 14% from April 2026.
- Enterprise Management Incentive scheme thresholds to be increased from 6 April 2026, enabling companies with gross assets of up to £120 million to issue options with a value up to £6 million. These thresholds were previously £30m and £3m respectively. The number of employees permitted for an eligible company will also increase from 250 to 500 (full-time equivalent).
VAT / Stamp Taxes
-
- Cross Border VAT grouping amendment: the rules will be clarified relating to operating cross-border VAT grouping from 26 November 2025 by reverting to the UK’s previous position.
- Charity Tax Relief: a new VAT relief will be introduced from 1 April 2026 for business donations of goods to charity for distribution to those in need or use in the delivery of their charitable services.
- Private Hire Vehicles Operators: following consultation, the government will not amend VAT legislation to allow Private Hire Vehicle Operators (PHVOs) to act as agents for tax purposes in all cases, but they will legislate to exclude suppliers of private hire vehicle and taxi services from the Tour Operators’ Margin Scheme, except in certain circumstances.
- Digital prompts for VAT: HMRC will be investing over the next five years to give real-time digital prompts for VAT filing software from April 2027.
- E-invoicing: All VAT invoices should be issued in a specified electronic format from April 2029.
- VAT treatment of land intended for social housing: The government will shortly consult on the reform of VAT rules to incentivise the development of land intended for social housing.
- Small parcel and duty: there will be a consultation on the removal of the duty-free £135 small parcel limit on imports.
Other
-
- Sugar tax: the tax on pre-packaged sugary drinks is to be extended to milkshakes and other milk-based drinks such as lattes and some protein drinks from 2028. The threshold at which the tax kicks in is also to be reduced from 5g/100ml to 4.5g/100ml.
- Fuel duty: the freeze on which was first introduced in 2011 is extended to September 2026. Fuel duty remains 52.95p/litre.
- Electric vehicle excise duty: there will be a mileage-based charge for electric vehicles will be 3p per mile, 1.5p per mile for plug-in hybrids from April 2028.
- High value council tax surcharge: This will come into force from April 2028, with four bands – £2m – £2.5m / £2,500, £2.5m – £3.5m / £3,500, £3.5m – £5m / £5,000 and over £5m / £7,500. Bands will rise each year in accordance with CPI.
Publication
Download a pdf summary here
Contact
If you would like to discuss any tax, audit or accountancy queries with one of our experts, please call our Leicester office on 0116 254 9262, or Loughborough office on 01509 263500. Alternatively, our contact form is here.