Key Announcements from the Budget and Their Impact on Your Money
Rachel Reeves, as Chancellor, has presented her second Budget, introducing a range of changes that have significant implications for households across the UK. The Budget includes an extended freeze on income tax thresholds and a reduction in the cash ISA limit. In addition, several new taxes and policy changes were announced, affecting various aspects of daily life.
Income Tax Threshold Freeze Extended
The Chancellor has decided to extend the freeze on the income tax thresholds, which were originally set to be unfrozen in 2028, until 2031. This decision means that more individuals will be pushed into paying higher taxes due to a process known as fiscal drag. It also implies that millions of state pensioners may start paying income tax on their state pensions for the first time by 2027.
The earnings threshold at which workers and pensioners begin paying income tax at a rate of 20 per cent remains frozen at £12,570 since 2022. As wages and pensions increase, more people are being dragged into paying this tax. Similarly, the higher rate of 40 per cent applies to those earning over £50,270, and this threshold has also been frozen since 2022, continuing until 2031.
According to projections by the Office for Budget Responsibility (OBR), this freeze could lead to 780,000 more basic-rate taxpayers and 920,000 more higher-rate taxpayers. However, it is important to note that this freeze will only apply in England, Wales, and Northern Ireland, as Scotland has its own system.
Cash ISA Limit Cut – But Only for Under-65s
Savers currently have the option to put up to £20,000 per year into ISAs, either cash or stocks and shares, to protect their returns from taxation. However, starting in 2027, the limit for the cash version of the account will be reduced to £12,000, with the remaining £8,000 needing to go into stocks and shares. Over-65s will still be able to retain the full cash allowance of £20,000.
This change aims to encourage more people to invest in stocks and shares, potentially boosting the economy, which has been experiencing slow growth since Labour came to power.
Higher Taxes for Savers and Landlords
Savers who do not use an ISA will pay tax on the interest they earn from savings accounts. Basic-rate taxpayers pay 20 per cent tax on interest earned over £1,000 per year, while higher-rate taxpayers pay 40 per cent on interest earned over £500. Additional-rate taxpayers pay 45 per cent on all their interest.
Starting April 2027, there will be a 2 percentage point increase in the basic, higher, and additional rates of saving income tax, raising them to 22, 42, and 47 per cent respectively. Similarly, landlords will see a 2 percentage point rise in the basic, higher, and additional rates of property income tax, increasing them to 22, 42, and 47 per cent.
Fuel Duty Freeze Continued
For the 15th consecutive year, fuel duty – the tax paid on petrol and diesel – will remain frozen. In 2022, the Conservative government introduced a 5p reduction, which was initially temporary. Reeves will maintain this 5p cut in fuel duty until September 2026, when it will be reversed through a staggered approach.
From April 2027, fuel duty rates will increase annually by the RPI measure of inflation. Fuel duty has not risen since April 2010, and before the introduction of the 5p per litre cut, it had been frozen at 57.95p per litre since March 2011.
Mansion Tax Introduced
A high-value council tax surcharge of £2,500 will be imposed on properties worth over £2 million, generating around £400m. Properties valued over £5 million will face a £7,500 charge. This “mansion tax” will be added to the existing council tax charge.
Council tax bands in England have not changed since 1991, meaning that property values are based on their value in that year. This has led to situations where luxury country homes end up in the same band as larger terraced houses.
New Gambling Taxes
Several changes to gambling duties have been announced. From April 2026, remote gaming duty will increase from 21 to 40 per cent, and bingo duty will be abolished at its current 10 per cent rate. From April 2027, a new rate of general betting duty for remote betting will be introduced at 25 per cent, excluding self-service betting terminals, spread-betting, pool bets, and horseracing.
The Government has also announced a freeze in casino gaming duty bands in 2026-27, with the usual increase in line with the RPI measure of inflation resuming after this period.
Energy Bills Down
The average household will see a £150 cut to their energy bill from April, according to Reeves. She criticized the previous Conservatives’ ECO scheme, calling it a failed initiative that cost households £1.7bn a year on their bills. By scrapping this scheme and other legacy costs, the Government aims to reduce energy bills and ease the cost of living.
Salary Sacrifice Change
Labour has tightened regulations on salary sacrifice schemes, which allow workers to give up part of their gross pay in return for non-cash benefits such as pension contributions, childcare, or electric cars. Starting April 2029, pension contributions above £2,000 a year using salary sacrifice will face National Insurance (NI). Workers can still receive income tax relief on their contributions, provided they contribute less than £60,000 a year.
Two-Child Benefit Cap Scrapped
The controversial two-child benefit cap has been removed. Currently, parents can only claim universal credit or tax credits for their first two children, which has been linked to increased child poverty. Removing this cap is expected to reduce child poverty by 450,000 by 2029/30, according to the OBR.
Increase to Minimum Wage and Living Wage
The Government announced an increase in both the minimum wage and the minimum living wage prior to the Budget. From 1 April 2026, the National Living Wage will rise by 4.1 per cent to £12.71 per hour for eligible workers aged 21 and over. This will increase the gross annual earnings of a full-time worker by £900, benefiting around 2.4 million low-paid workers.
Meanwhile, the minimum rate for 18 to 20-year-olds – the National Minimum Wage – will also increase by 8.5 per cent to £10.85 per hour, resulting in an annual earnings increase of £1,500 for a full-time worker.
Pay-per-Mile Levy on Electric Cars
A new tax on electric vehicles has been introduced. Drivers of battery electric cars will be charged a 3p per mile tax from April 2028.
Milkshake Tax and Sugar Tax Changes
To combat obesity, a sugar tax currently applies to drinks with a sugar content of 5g per 100ml. This threshold will be lowered to 4.5g per 100ml, expanding the number of products affected. The exemption for milk-based drinks, such as milkshakes, will also be removed.
Help to Save Scheme Made Permanent
The existing Help to Save scheme is to be made permanent from 2028. The scheme offers certain people receiving universal credit a bonus of 50p for every £1 they save over four years. Savers can save up to £50 per month, with the Government providing a 50 per cent bonus. The maximum deposit allowed is £2,400, resulting in a £1,200 bonus.
Motability Changes
Reeves is launching a tax crackdown on the Motability scheme, which provides cars to disabled people. This could result in increased costs for those claiming disability benefits. The Chancellor is ending some tax reliefs worth around £100m a year. This follows an announcement that Motability will stop offering luxury models such as BMWs, Audis, and Mercedes “immediately”.