In her Autumn Budget last year, the Chancellor announced a series of measures which are scheduled to take effect from April 2026 (or later). So, as well as the Autumn Budget 2025, this insight will also briefly comment on the overall tax landscape in which we are operating.
The big freeze continues: income tax rates and bands
Former Chancellor, Jeremy Hunt, began a programme of freezing income tax bands which was scheduled to end in April 2028. Chancellor Rachel Reeves announced that the freeze of income tax bands will continue until April 2031. So, until April 2031 (and ignoring dividend, savings and property income on which there is more below), the income tax bands will be as follows:
- personal allowance for income between £0 and £12,570, so a 0% income tax rate;
- basic rate band on taxable income between £12,571 to £50,270, 20% rate;
- higher rate band on taxable income from £50,271 to £125,140, 40% rate;
- additional rate band for taxable income of £125,141 and above, 45% rate.
Not only does the freeze in the bands increase the chance of taxpayers being dragged into higher or additional rates as their taxable income increases, but it also increases the chance of taxpayers being hit by the £100,000 “cliff edge”. This “cliff edge” operates in two ways.
First, for every £2 of taxable income above £100,000, the personal allowance reduces by £1. Therefore, if a tax payer has taxable income of £125,140, the “slice” between £100,000 and £125,140 is taxed at an effective rate of 60% as a result of the interaction between the 40% tax rate and the phasing out of the basic rate band which pushes the first £12,570 of taxable income into basic rate tax.
Second, if a household has a member with adjusted taxable income in excess of £100,000, then the household immediately loses its entitlement to tax free child care and to funded child care hours for children under 3. The £100,000 “cliff edge” will therefore need to be carefully considered by anyone devising an incentive or bonus scheme where the return is taxed as income.
Just for completeness, the inheritance tax threshold was frozen at £325,000 until April 2030. This is to be pushed out to April 2031.
National insurance and pension salary sacrifice
Employees’ national insurance is deducted from earnings in excess of £12,570 and up to £50,270 at the 8% rate and on earnings over £50,270 at the 2% rate. Employees aged over the state pension age are not subject to the deduction of employees’ national insurance on their earnings and, despite speculation to the contrary, this exemption has been maintained.
Separately, once an employee has earnings over £5,000 then those earnings are subject to employer’s national insurance at the 15% rate.
Reflecting on the thresholds above, if an employment package can be structured so that it is free of employees and employer’s national insurance then it can deliver benefits for employees and employers.
Under a salary sacrifice arrangement, an employee can sacrifice gross salary for a benefit which is free of both income tax and any form of national insurance. For example, under pension salary sacrifice an employee can sacrifice gross salary for an employer pension contribution. Not only is the contribution free of income tax, it is also free of employees’ and employer’s national insurance too. The Chancellor announced a cap on the amount of salary which can be sacrificed whilst maintaining the national insurance benefits, namely there is to be an upper limit of £2000 per tax year. The change is scheduled to take place from April 2029.
There are a couple of context points to note here:
- First, going back to the £100,000 income tax “cliff edge” discussed above, certain employees have actively used pension salary sacrifice to keep their earnings below £100,000. The £2000 tax year cap could make this objective harder to accomplish.
- Second, at last year’s Autumn Budget, the Chancellor announced that from April 2027 if an individual passes away leaving money in a defined contribution pension pot, then those monies will be within the scope of inheritance tax, subject to spouse, civil partners and charitable exemptions and the £325,000 threshold. Therefore, the latest salary sacrifice measure should be seen as part of a cluster of reforms which limit the tax benefits associated with DC pension schemes.
Mansion taxes
The Chancellor announced a mansion tax for individuals who own expensive dwellings which are worth more than £2m. It appears that the value over the £2m threshold will be within the scope of the tax.
Details are sparse at the time of writing. However, it may be the case that the council tax system will be used as the starting point for the charge with properties in bands F, G and H being revalued to establish if the £2m threshold has been exceeded. The revaluation process will take time to implement and so the mansion tax may not be implemented until 2028.
It appears that the tax will be collected through the council tax system, although taxpayers will have the ability to defer payment (but with an interest charge) until either the sale of the property or death, whichever is earlier. Clearly a freehold sale will be a sale for these purposes. However, what about the grant of a lease? At what stage will the grant of a lease be so like a sale that it should be treated as a sale for these purposes?
It is unclear whether the mansion tax will apply to dwellings held as investments as well as for a dwelling just used for an individual’s personal private dwelling.
It should be noted that corporate structures already have their equivalent of the mansion tax in place, notably the annual tax on enveloped dwellings and the 17% SDLT charge. The thresholds for the annual tax on enveloped dwellings and the 17% SDLT charge for corporates are £500k; however, these charges are subject to exemptions which are designed to apply where the dwelling is used not as a controlling shareholder’s personal private dwelling but for third party commercial purposes. Therefore, placing a dwelling into a corporate structure is unlikely to mitigate a mansion tax exposure.
Gambling taxes
Gambling companies are currently subject to three types of gaming duty. First, remote gaming duty is imposed on games of chance, and levied at the 21% rate on profits. Second, machine games duty is imposed on the net takings of machines which have the facility to pay out a cash prize greater than the cost to play and which is currently imposed at the 20% rate. Third, a general betting duty is imposed on the profits of sports betting and horse betting; it is imposed at the 15% rate.
The Chancellor announced that the remote gaming duty rate would be increased to 40%. No rise was announced in machine games duty. General betting duty remains at the15% but it will rise to 21% when the activity takes place on line from April 2027 (but with a carve out for horse racing).
Electric cars, plug in hybrids and fuel duty
The gradual switch to electric cars is, by its very nature, not beneficial for one of the Government’s important revenue raisers, namely fuel duty.
With this in mind, the Chancellor launched a consultation on introducing a “pay per mile” charge for electric cars of 3p per mile and a 1.5p per mile charge for plug in hybrids too.
Turning to fuel duty, the Chancellor announced that the 5p cut in fuel duty which is currently in place would be maintained until September 2026.
A smorgasbord of additional taxes
Sugar taxes
In his role as the Health Secretary, Mr Streeting gave a budget announcement on Tuesday. There is a sugar levy imposed on drinks with a sugar content of more than 5g per 100ml. To date, the levy has been imposed predominantly on fizzy drinks as milk based products are currently exempted. Mr Streeting announced the end of the exemption for milk based drinks, apart from milk based drinks made in cafes and restaurants. So, if you buy a pre-prepared latte or milkshake from a supermarket, your beverage may now be within the scope of the levy.
Cash ISAs
The amount which an individual can save in a cash ISA is to be cut from £20,000 to £12,000 for the tax year beginning 6 April 2027, but with over 65s retaining the full cash ISA allowance.
Capital allowances
Companies and unincorporated businesses qualify for capital allowances on certain types of plant and machinery. Companies can qualify for full expensing on acquisitions of new plant and machinery at the 100% rate, (as more fully discussed in the context section below). Outside full expensing companies currently qualify for capital allowances at the 18% (main rate expenditure) and the 8% rates. The Chancellor announced that the Government will introduce a new 40% First Year Allowance for main rate expenditure - including most expenditure on assets for leasing and expenditure by unincorporated businesses – from 1 January 2026. From 1 April 2026 for Corporation Tax and 6 April for Income Tax, main rate writing-down allowances will reduce from 18% to 14%.
Dividend, interest and property income
The Chancellor has announced a significant income tax extension which will apply to individuals. Tax on dividend income will increase by 2 percentage points. 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%. Tax on savings income will increase by 2 percentage points across all bands. The basic rate will rise from 20% to 22%, the higher rate from 40% to 42%, and the additional rate from 45% to 47% from April 2027. The Government is creating separate tax rates for property income. Income tax is already charged on property income. These separate rates mean property income will have its own individual tax rates (as already occurs for the taxation of savings and dividend income). From April 2027, the property basic rate will be 22%, the property higher rate will be 42% and the property additional rate will be 47%. Finance cost relief will be provided at the separate property basic rate (22%). The timing of these changes may impact on when the relevant income is to be recognised.
Capital gains tax and employee ownership trusts
Historically sales of controlling shareholdings in trading companies to employee ownership trusts or EOTs occur on a no gain no loss basis for capital gains tax. This is a generous relief but the Chancellor plans to make it less generous with effect from 26 November. Only 50% of any gain will fall within the favourable no gain no loss rules and with the remaining 50% being taxed under standard capital gains tax rules.
Tourism tax
It has already been announced that a tourist tax will be imposed in Edinburgh for stays from 24 July 2026 onwards as a result of the Scottish Government’s devolved tax powers. On Tuesday, it was announced that English mayors would be granted the power to impose a tourist tax too. If England follows the Scottish example, then it appears amounts paid under the tourist tax will be subject to VAT too.
Parcels and customs duty
Currently, parcels with a value of £135 or less can be imported into the UK without customs duty being paid. This benefits overseas exporters into the UK which are based in jurisdictions which do not enjoy the benefit of a free trade agreement with the UK. This benefit for overseas exporters into the UK is to go, but with effect from April 2029.
VAT and taxi fares
Currently certain cab companies are of the view that they are only required to charge VAT to their individual customers on their profit margin through the operation of what is known as the VAT tour operators’ margin scheme. To put the matter beyond doubt, the Chancellor confirmed that going forward VAT would be charged on the gross fare which a cab business received from the individual customer, and not just on its margin.
Taxation of entertainers and sportspeople/ image rights
Often, an employed sportsperson will receive fees for the exploitation of their image as well as a salary. From April 2027 legislation will be introduced for image rights fees to be employment income where it relates to an employment.
A platter of tax incentives
Stamp duty on newly-listed company shares
The Chancellor announced the abolition of stamp taxes on transfers of shares in UK incorporated companies which are newly-listed in the UK for a three-year post list period (non UK incorporated listed companies can and do structure their share transfers so that they are exempt from stamp taxes in any event). By way of comparison, AIM shares enjoy a full stamp duty exemption.
EMI share options
EMI company share options are a valuable tax incentive for key employees if granted by the employer company. If an EMI share option is granted at its market value at the grant date, then employees can see their upside taxed as capital gain rather than as employment income (capital gains tax rates (generally 24%) are at a favourable discount to income tax rates as well as being national insurance free). However, for a company share option award to qualify for EMI status a number of conditions need to be met. Currently, a company (or group) cannot grant EMI options if there are more than 250 employees or if gross assets exceed £30m. The Chancellor announced that these limits would be relaxed and that they would be changed to 500 employees and £120m respectively from April 2026. Further, the share option limit will increase to £6m from April 2026.
EIS and VCT arrangements
In short, EIS and VCT arrangements deliver income and capital gains tax breaks for their investors. The arrangements are to be amended to be less focused on early stage companies. In particular, the investment thresholds for investee companies are to be stretched. So, from April 2026 the annual company investment limit will increase from £5m to £10m, the lifetime limit will increase from £12m to £24m and the gross assets test will increase from £15m before the share issue to £30m after the share issue.
The Budget (in context)
Clearly, this Budget gives advisers and clients plenty to work through. On occasions, it is too easy to focus exclusively on a budget and to ignore many of the tax developments which have already been pre-announced. In order to make sure that readers are not dazzled by the budget resulting in them losing their overall focus on the tax landscape, here are some of the measures which have already been baked in.
The UK Treasury has published a corporate tax roadmap which is designed to keep the UK competitive and to support investment throughout the life of this parliament. The roadmap makes a commitment to maintain a 25% corporation tax rate, to maintain capital allowances full expensing for certain new types of plant and machinery, to maintain the £1m annual investment allowance for capital allowances, to keep the structures and buildings allowance and to keep R&D tax credits. These are generous reliefs which are designed to support UK enterprise.
As part of the corporate tax road map, and earlier in the year, the Government published draft legislation to reform the UK’s transfer pricing rules; these rules require certain transactions between connected enterprises to be at an arm’s length price for tax purposes, regardless of the actual contract price. The reforms are due to take effect for accounting periods beginning on or after 1 January 2026 for corporates. In addition to amendments of a technical nature, two changes have been announced which are likely to have a significant impact on business.
First, the UK’s current exemption from transfer pricing for SMEs is to be retained. Separately, the Government has proposed that an internationally controlled transactions schedule should be introduced under which certain transactions will be reported directly to HMRC. Businesses should ensure that they have the systems in place to handle this type of reporting. Second, the scope of UK transfer pricing is to be reformed so that it will no longer apply in the UK to UK intra group context, subject to certain exemptions. This reform may simplify the implementation of intra group reorganisations where transfer pricing risks can be a compliance challenge under existing legislation.
The Government has also introduced draft legislation governing the PAYE and national insurance obligations of umbrella companies. Umbrella companies are companies which employ workers, and which make the workers available either to an end client or to an agency which supplies them. The legislation is slated to take effect on 1 April 2026. In summary, if the umbrella company defaults on its PAYE and national insurance obligations, the end client company which is buying in the labour or any agency above the umbrella company in the supply chain can be held to be jointly and severally liable for the unpaid tax. End users and agencies need to review their supply chains and contractual indemnities to guard against these risks when they are buying in labour.
There have already been some significant announcements on the taxation of wealth. Last year’s Autumn Budget announced significant and high profile limitations to inheritance tax business property relief and agricultural relief. These changes apply to individuals and to trusts. In short, assets (including shares) which currently enjoy 100% business property relief or agricultural relief will have their entitlement to relief capped at 50% once a £1m threshold has been exceeded. These changes are to take effect from 6 April 2026 and persons who may be affected should review their wealth strategies now. However, the Chancellor announced a helpful amendment. To the extent that a deceased spouse or civil partner has not used up their £1m threshold on death the unused portion of the threshold will pass to the surviving spouse/ civil partner.
Continuing the wealth theme, last year’s Autumn Budget also made capital gains tax business asset disposal relief less generous by increasing the capital gains tax rate for business assets from 10% to 14% with a further increase to 18% slated for 6 April 2026. However, business sellers should be aware of the rate increase in setting the timetable for their business/ company sales in the new calendar year.
Further, April 2026 is likely to be a significant month in the world of business rates. Property values for business rates purposes are likely to be revalued with effect from April 2026. Affected businesses may wish to review the amount of real estate which they hold in light of the revaluation.
This Budget may seem like a “tax smorgasbord”, especially when you take into account the measures which have already been announced. However, timing is everything, and you will see that many of the measures announced will take effect from April 2026 or even later in the case of the pension salary sacrifice measures. This gives clients and advisers time to work through the Budget and to come up with appropriate strategies which may even involve lobbying the Government for changes to the legislation.