Financial Year 2025/26: What Has Changed?
As the UK embarks on the financial year 2025/26, a series of significant fiscal and policy changes are set to reshape the economic landscape. These adjustments, introduced by Chancellor Rachel Reeves, aim to address the nation's fiscal challenges while fostering long-term growth. This article delves into the key changes across various sectors, providing a comprehensive overview for individuals and businesses navigating the new financial year.
Tax Reforms
Employer National Insurance Contributions
From 6 April 2025, the rate of employer National Insurance will increase by 1.2 percentage points, rising to 15%. Additionally, the Secondary Threshold—the level at which employers become liable to pay National Insurance on each employee’s salary—will reduce from £9,100 per year to £5,000 per year.
To mitigate the impact on smaller businesses, the Employment Allowance will increase to £10,500 from £5,000 and will be extended to all eligible employers by removing the £100,000 cap. This adjustment allows firms to employ up to four National Living Wage workers full-time without incurring employer National Insurance on their wages.
Capital Gains Tax Adjustments
Capital Gains Tax (CGT) rates are set to increase:
- Lower Rate: Rising from 10% to 18%.
- Higher Rate: Increasing from 20% to 24%.
These new rates will align with the existing residential property rates, which remain unchanged at 18% for the lower rate and 24% for the higher rate. The Office for Budget Responsibility (OBR) projects that these changes will raise £2.5 billion by the end of the forecast period.
Inheritance Tax Reforms
Inheritance tax thresholds will be fixed at their current levels until April 2030. From April 2027, inherited pension pots will be subject to inheritance tax, addressing previous distortions where pensions were used as tax planning vehicles.
Additionally, from April 2026, agricultural property relief and business property relief will be reformed. The highest rate of relief will continue at 100% for the first £1 million of combined business and agricultural assets, with the rate reducing to 50% beyond this threshold. These reforms are expected to affect the wealthiest 2,000 estates each year and are projected to raise £2 billion to support public services.
ISAs
Individual Savings Accounts (ISAs) remain a cornerstone of UK tax-efficient saving strategies. For the 2025/26 tax year, the overall ISA allowance continues to sit at £20,000, which can be split across Cash ISAs, Stocks & Shares ISAs, Innovative Finance ISAs, or Lifetime ISAs (with the latter still capped at £4,000).
Here are a few points to keep in mind when planning your ISA contributions this year:
- Steady Allowance, Flexible Allocation
Even with no major headline increase to the annual limit, the ability to mix-and-match across different ISA types still provides flexibility. If you’re saving for a house deposit or planning retirement, the Lifetime ISA is often worth maximising first for its government bonus—though remember it’s capped at £4,000 per year. After that, channel your remaining ISA allowance into a Cash or Stocks & Shares ISA to keep your growth sheltered from tax. - Potential Rate Improvements
Bank of England base rate movements in previous years have boosted interest rates offered on some Cash ISAs, so if you haven’t reviewed yours recently, the new tax year is a good reminder to check whether your ISA is still competitive. A fraction of a percent can make a significant difference over time—especially when returns are tax-free. - Stocks & Shares ISAs for Longer Horizons
A Stocks & Shares ISA continues to be a tax-efficient way to invest in equities, bonds, or funds over the long haul. Even in challenging market conditions, dividends and capital gains within an ISA are protected from tax. If your strategy involves monthly contributions, consider using the new tax year to set up or increase direct debits—so you stay consistent even when markets fluctuate. - Lifetime ISA Nuances
While the Lifetime ISA (LISA) limit is still part of the overall £20,000 ISA pot, it’s essential to remember the government bonus remains at 25% of whatever you contribute (up to £4,000). For those under 40 looking to buy their first home or eventually bolster their retirement savings, this can be a valuable supplement to any workplace pension. - Innovative Finance ISAs
If you’re comfortable with peer-to-peer lending, the Innovative Finance ISA is another way to diversify. Rates here can be tempting, but do keep risk in mind—returns are never guaranteed, and your capital can be at risk if borrowers default.
In short, the 2025/26 tax year might not bring radical changes to the ISA system itself, but the steady allowance and the resilience of tax-free growth remain compelling reasons to use these accounts to their full potential. As the broader economic environment shifts, a well-chosen ISA strategy can help keep your savings growing securely.
Public Investment Initiatives
Infrastructure and Housing
The government has committed to boosting public investment by over £100 billion over the next five years, focusing on rebuilding schools, hospitals, and roads. This includes an additional £500 million for local road maintenance in 2025/26, bringing the total dedicated to fixing roads in England to nearly £1.6 billion. Furthermore, an extra £200 million will be allocated to Metro Mayors for local transport, and over £650 million will be invested in improving transport in towns, villages, and rural areas.
In the housing sector, the Affordable Homes Programme will receive an additional £500 million, increasing it to £3.1 billion—the largest annual budget for affordable housing in over a decade. This investment aims to support the delivery of tens of thousands of new homes. Additionally, £3 billion of support will be provided to SMEs and the Build to Rent sector by expanding existing housing guarantee schemes, fostering a strong and diverse private housing market.
Research and Development
To position the UK as a leader in fast-growing industries, the government has announced a significant package of support, including over £1 billion in new tax reliefs for creative industries and £270 million in automotive and aerospace R&D projects. An additional £120 million will top up the Green Industries Growth Accelerator to help build supply chains for offshore wind and carbon capture and storage. Furthermore, £45 million will fund medical research to develop new medicines for diseases like cancer, dementia, and epilepsy.
Welfare System Overhaul
The government has announced a significant overhaul of the welfare system, aiming to save £5 billion to address financial challenges. The reform is intended to encourage employment among welfare recipients, with proposed changes including stricter assessments for disability benefits and an increase in Universal Credit. Critics argue that these reforms may adversely affect the most vulnerable, particularly those unable to work.
Fiscal Policies and Public Finances
Chancellor Rachel Reeves has affirmed the UK's commitment to adhering to fiscal rules despite global economic disruptions. In light of slow economic growth and increasing borrowing costs, Reeves warns of possible public sector job cuts. The government plans to cut 10,000 public sector jobs to reduce civil service costs, following the COVID-era expansion. Additionally, rising international trade concerns and increased defence spending in response to global security challenges add to the economic strain.
Digital Services Tax Adjustments
The UK is considering adjustments to its 2% digital services tax on US technology companies to mitigate the impact and secure a trade deal with the US. Options include altering the flat rate, increasing the tax-free revenue threshold, or applying the tax to profits instead of revenues. This move aims to address concerns from US tech companies and avoid reciprocal tariffs while maintaining the expected revenue of approximately £800 million in 2024/25.
Non-Domiciled Tax Status Reform
The UK is experiencing an increasing brain drain among wealthy individuals due to changes in tax policies, particularly around the inheritance tax regime and the phasing out of the non-domiciled (non-dom) tax status. These changes are prompting many affluent residents to relocate to countries with more favourable tax environments, resulting in a significant loss of talent and investment for the UK. The government needs to swiftly address these issues to prevent further departures.
Navigating these changes requires strategic planning and adaptation for both individuals and businesses. Understanding these reforms will be essential for making informed decisions in the financial year 2025/26.
