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After months of uncertainty and speculation the wait is finally over, and the Chancellor has delivered the Autumn Budget, albeit late in the season. It was preceded by numerous leaks, and briefings by the Government, laying the groundwork for another tax-raising budget. Just twelve months ago Reeves assured that she 'wouldn't be back for more' having increased taxes by £40 Billion.
The Office for Budget Responsibility confirmed (early!) this was a £26 billion tax-raising budget and many will consider it to contain policies that break Labour’s manifesto commitments.
Income Tax thresholds and rates
The ‘big’ measure was an extension of the freeze on income tax bands and the personal allowance. This is set to raise £8 billion by 2029/30 as the effects of fiscal drag means that more people will start paying income tax at a higher rate.
Above-target inflation over recent years has boosted the effectiveness of this approach from a tax raising perspective but one does have to wonder if it was ever envisaged that 24% of income taxpayers would be paying the higher rate of tax. In 1991/92 just 3.5% of UK adults paid higher rate tax and it was 15% as recently as 2021/22. The Institute for Fiscal Studies described the outlook for family disposable income as 'truly dismal' with forecasts showing it would grow by only 0.5% annually over the next 5 years compared to the more than 2% per year on average across every parliament from the mid-1980s to mid-2000s.
Reports had suggested Reeves was set to increase the rates of income tax, and whilst the declaration has been that this didn’t take place, we have in fact seen the creation of a new income tax rate for property income from April 2027, and an increase in the savings rate, each at 2% points higher than the current rates. These are both elements of income tax.
Many of our clients operating through limited companies will consider themselves ‘working people’ and will be disappointed to learn the basic and higher rate income tax on dividends is also increasing by 2% points, this time taking effect from April 2026. The result will be a higher-rate taxpayer now facing an effective marginal tax rate of 52% (after corporation tax at 25%).
Further burden for employers and the employment market
Employers will feel they suffered the most 12 months ago with the additional National Insurance Contributions (“NICs”) burden coupled with the inflation-busting National Living Wage (“NLW”) and National Minimum Wage (“NMW”) increases. The NLW and NMW are increasing again from April 2026 by 4.1% and 8.5% respectively. This will inevitably have a knock-on effect on salary expectations particularly for those earning just above those levels. Although the increase of the NLW is not as dramatic as previously the cumulative impact over the last few years is striking. Businesses unable to pass on these costs by way of price increases, or improving their productivity, will face reduced profitability which in many cases threatens their financial sustainability. There is also increasing concern that young people are being priced out of employment, especially in rural communities with more limited job opportunities and areas with historically lower wages.
Although not scheduled to take effect until 2029 it was also announced that salary sacrifice for pensions will be capped at £2,000 per year. How salary sacrifice is defined is key, but the direction of travel is an increased NICs cost for employees and employers currently using a salary sacrifice approach. This is expected to raise £4.7 billion.
No delay on Making Tax Digital
There was no delay for the introduction of Making Tax Digital for Income Tax (“MTD for ITSA”), although there will be a ‘soft landing’ on penalties. MTD for ITSA will apply to individuals with sole trade turnover and/or rental income over £50,000. It is not currently a concern for those trading through a limited company or partnership, but qualifying sole traders and landlords will need to make quarterly submissions to HMRC from April 2026.
A welcome change to £1 million IHT allowance
On a positive note, there was an important relaxation of the new Inheritance Tax (“IHT”) rules which will be welcomed by farmers and business owners in particular. The £1 million IHT “allowance” (or cap) announced last year for 100% agricultural and business property reliefs (APR and BPR) on transfers from 6 April 2026 is now to be transferable between spouses. For many families, this will lessen the need to share property ownerships more equally between spouses. It will also allow property to continue being left entirely to the surviving spouse on first death, instead of the first £1 million needing to be left to children or a discretionary trust to capture the allowance. Despite this relaxation, more equal property ownership, and the transfer of some property to children or a discretionary trust on first death may well still provide an advantage in terms of the residence nil rate band.
Conclusion
Overall, it is a shame the pre-budget leaking and associated speculation led to such damage to economic sentiment. It would have been great to see pro-growth strategies and positive steps to reform unhelpful features of the UK tax system, such as the high effective marginal tax rates caused by the abatement of the personal allowance, the withdrawal of child benefit or childcare funding at higher earning levels. It is perhaps a relief that no further significant changes were announced to capital gains tax or inheritance tax and hopefully we can now plan with a bit of confidence. A fuller summary of the changes announced is included below and we are set to learn more over the coming weeks and months when the full technical detail is released.
Personal tax
The Chancellor announced that she would extend the income tax “threshold freeze”. This had been due to end in 2028 but has now been extended to April 2031. As a reminder, the thresholds will now remain at:
Band Taxable income
Personal Allowance £12,570
Basic rate band £12,571 to £50,270
Higher rate band £50,721 to £125,140
Additional rate band over £125,140
Tax on property income
Property income is any income from letting land or buildings. The government has confirmed they will increase the income tax rates for property income by 2% from 6 April 2027, meaning property income will be taxed at the following rates:
Band Tax rate
Basic rate 22%
Higher rate 42%
Additional rate 47%
Tax on savings income
Savings income is income such as interest earned on amounts held on deposit with banks and building societies. As with property income, the government has confirmed that they will increase the income tax rates for savings income by 2% effective from 6 April 2027, meaning savings income will be taxed at the following rates:
Band Tax rate
Basic rate 22%
Higher rate 42%
Additional rate 47%
Tax on dividends
The dividend allowance of £500 has been retained for the 2026/27 tax year. From 6 April 2026 there will be a 2% increase in the dividend tax rate but only at the basic rate and the higher rate. The additional rate will remain unchanged. This means dividend income will be taxed at the following rates from 6 April 2026:
Band Tax rate
Basic rate 10.75%
Higher rate 35.75%
Additional rate 39.35%
Individual Savings Accounts
From 6 April 2027 the annual ISA cash limit will reduce from £20,000 to £12,000. The remaining £8,000 will be designated for stocks and shares ISA investment. This restriction will not apply to those over the age of 65, where the cash ISA limit will remain at £20,000.
Pension Salary Sacrifice changes
A pension salary sacrifice is when an employee agrees to reduce their gross salary (or bonus) and the employer pays this into the employee’s pension scheme, saving the employee income tax and national insurance, and the employer employers national insurance.
From 6 April 2029, only the first £2,000 will be exempt from both employers and employees national insurance. Previously there had been no limit.
The individual is still able to make contributions above £2,000, but employee contributions above £2,000 would be subject to employee and employer national insurance. It has been confirmed that (subject to the usual limits) pension contributions will still be exempt from income tax.
National living wage and National Minimum Wage
The government has announced the annual increases to the national minimum wage and the national living wage which will come into force from 1 April 2026:
Apprentices £8 per hour
16-17 £8 per hour
18-20 £10.85 per hour
21+ £12.71 per hour
Inheritance Tax
The inheritance tax nil rate band continues to be frozen at £325,000 until 5 April 2031. The Residence Nil Rate Band will also continue to be frozen at £175,000 until 5 April 2031, with the taper limit for this band also remaining at £2 million
Agricultural Property Relief & Business Property Relief
From 6 April 2026, agricultural and business property will continue to receive 100% Inheritance Tax Relief up to a limit of £1 million. The £1 million limit applies per person and is a combined limit for both agricultural and business property. Such property in excess of the limit will benefit from a 50% relief.
From 6 April 2026, the government confirmed that this allowance will be transferable between married couples or civil partners. This will include where the first death was before 6 April 2026. There may be a further £1 million allowance for trusts in certain situations, but the rules are complex. The £1 million limits for both individuals and trusts will be frozen until 6 April 2031.
Capital Gains Tax
The Capital Gains Tax rates remain unchanged for 2026/27 and the annual exempt amount will remain at £3,000 for 2026/27.
The rate applying for individuals claiming Business Asset Disposal Relief and Investors’ Relief will increase to 18% for disposals made on or after 6 April 2026.
Employee Ownership Trusts
The current relief available for qualifying disposals by business owners selling their shares to Employee Ownership Trusts (EOTs) is a 100% exemption of any gain. However it was announced that effective immediately (26 November 2025), the relief will only exempt 50% of the gain and Business Asset Disposal Relief and Investors’ Relief will not be available where the 50% exemption has been claimed.
The remaining 50% of the gain on disposal will not form part of the disposer’s chargeable gain. Instead, 50% of the gain will be held over and deducted from the trustees’ acquisition cost. This will mean that it will come into charge on any subsequent disposal or deemed disposal of the shares by the trustees of the EOT.
Capital allowances
There will be a reduction in the main rate Writing Down Allowance (WDA) from 18% currently to 14% per year from 1 April 2026 for Corporation Tax purposes and 6 April 2026 for income tax. The WDA on the special rate pool remains unchanged at 6%.
For expenditure incurred on or after 1 January 2026, the government will introduce a new first year allowance (FYA) of 40% for all businesses on main rate assets, including most expenditure on assets for leasing. Cars, second-hand assets and assets for leasing overseas will not be eligible.
The Annual Investment Allowance is available to both incorporated and unincorporated businesses. It gives a 100% write-off on certain types of plant and machinery up to certain financial limits per 12-month period. The limit remains at £1 million.
The 100% FYA for qualifying expenditure on zero emission cars and the 100% FYA for qualifying expenditure on plant or machinery for electric vehicle charge points have been extended to 31 March 2027.
Corporation Tax
The government has announced that it will not be changing the current rates of corporation tax.
Electric Vehicle Excise Duty (eVED)
The government is introducing a new eVED whereby a new mileage charge will apply to electric and plug in hybrid vehicles. This will come into effect from 1 April 2028 with electric vehicle owners paying 3p a mile and hybrid vehicles owners paying 1.5p a mile.
Other matters
Making Tax Digital for Income Tax starts in April 2026 for those with qualifying income over £50,000. The government will expand the rollout of the programme to those with incomes over £30,000 in April 2027 and £20,000 in April 2028. However, the government will not proceed with Making Tax Digital for Corporation Tax.
The government is changing the annual investment limits that apply to Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) from 6 April 2026, as well as revising the gross asset requirement limits.
Certain limits relating to Enterprise Management Incentive Schemes (EMI) have also been increased allowing greater scope for investment.