How Does the UK Budget 2025 Affect Higher Earners?
The 2025 UK Budget introduces several measures that will significantly impact higher earners over the coming years. Whilst headline income tax rates remain unchanged, a combination of frozen thresholds, new caps on tax-advantaged pension contributions, and increased taxes on investment income will mean many higher earners face a larger tax bill by the end of the decade.
The Continued Freeze on Tax Thresholds
Perhaps the most far-reaching measure affecting higher earners is the extension of the tax threshold freeze. The personal allowance of £12,570 and the higher-rate threshold of £50,270 will now remain frozen until April 2031, three years longer than previously planned.
This creates what economists call "fiscal drag", where rising wages push more people into higher tax bands even though the headline rates haven't changed. As salaries increase with inflation, a growing portion of income gets taxed at 40% or 45% without any formal tax rate rise.
The Office for Budget Responsibility estimates that by 2029-30, this extended freeze will create approximately 920,000 additional higher-rate taxpayers and around 4,000 more additional-rate taxpayers compared to a scenario where thresholds had risen normally. The measure is projected to raise around £8 billion annually by the end of the decade.
For someone earning £75,000 today, even modest wage growth over the next six years will push thousands of pounds of their income into the higher-rate band. The effect compounds year after year, making this one of the most significant tax increases in the Budget despite appearing relatively minor at first glance.
Changes to Salary Sacrifice Pension Schemes
From April 2029, salary sacrifice pension arrangements will face new restrictions. The government will cap National Insurance relief on salary-sacrificed pension contributions at £2,000 per year. Any contributions above this threshold will be treated like ordinary employee pension contributions and will attract both employer and employee National Insurance.
This change primarily affects higher earners who currently use salary sacrifice to make substantial pension contributions whilst avoiding National Insurance on those amounts. The measure is expected to raise £4.7 billion in 2029-30 and £2.6 billion in 2030-31.
| Current arrangements | From April 2029 |
|---|---|
| Unlimited NI relief on salary sacrifice | Only first £2,000 exempt from NI |
| Both employer and employee save NI | Contributions above £2,000 face standard NI rates |
| Popular among higher earners | 74% of basic-rate taxpayers unaffected |
The government argues that the existing structure disproportionately benefits higher earners, particularly those in sectors like financial services who sacrifice bonuses into pensions. The three-year lead time gives employers and employees an opportunity to review their pension strategies and potentially restructure arrangements.
Increased Taxes on Investment Income
Higher earners with income from investments face a 2 percentage point increase across dividend, property, and savings income tax rates. This change brings these income sources closer to the tax treatment of earned income, which also faces National Insurance contributions.
The new rates from April 2026 will be:
- Basic rate: 10% (from 8.75%) for dividends, 22% for property and savings income
- Higher rate: 35% (from 33.75%) for dividends, 42% for property and savings income
- Additional rate: 41.1% (from 39.35%) for dividends, 47% for property and savings income
For someone receiving £20,000 in annual dividend income at the higher rate, this represents an additional £250 in tax each year. The change reflects the government's stated aim to reduce the gap between tax paid on work and tax paid on income from assets.
The High-Value Property Surcharge
A new "mansion tax" will apply to residential properties valued over £2 million from 2028. Whilst full details remain limited, this surcharge on Council Tax is expected to raise approximately £400 million annually and will primarily affect London and the South East, where high-value properties are concentrated.
Properties valued over £5 million are expected to face an even higher surcharge rate, though the precise thresholds and rates have not yet been published.
ISA Allowance Changes
From April 2027, the overall ISA allowance remains at £20,000, but the rules change significantly for those under 65. The amount that can be held in cash ISAs will be capped at £12,000, with the remaining £8,000 required to be in stocks and shares ISAs if savers wish to use their full allowance.
This change nudges younger savers towards investment products rather than cash savings, though it may affect higher earners who use cash ISAs as part of their emergency fund or short-term savings strategy. Those aged 65 and over can continue to use the full £20,000 in cash ISAs if they wish.
The Cumulative Impact
When viewed individually, each measure might seem modest. However, the combined effect represents one of the most significant shifts in taxation for higher earners in recent years. Analysis suggests that the overall tax burden will reach 38% of GDP by 2030-31, the highest level on record, with around two-thirds of this increase coming from personal taxes rather than business taxes.
For a higher earner on £100,000 with investment income and a property portfolio, the various measures could add several thousand pounds to their annual tax bill by 2030. The exact amount depends on individual circumstances, but the direction is clear: higher earners will contribute substantially more to the Exchequer over the coming years.
What Higher Earners Can Do
Several strategies may help mitigate the impact of these changes:
- Maximise pension contributions now: With three years before the salary sacrifice cap takes effect, higher earners can still benefit from the current rules by maximising contributions through 2028-29.
- Review investment structures: The increased tax on dividends and property income makes tax-efficient wrappers like ISAs and pensions more valuable than ever.
- Plan around the threshold freeze: Being aware of where your income sits relative to the £50,270 and £100,000 thresholds can help with timing bonuses or other flexible income.
- Consider the full ISA allowance: Even with the cash ISA restriction, using the full £20,000 allowance remains a powerful tax shelter, particularly as investment income taxes rise.
- Seek professional advice: With multiple changes interacting in complex ways, professional financial advice may be worthwhile for those with substantial assets or income.
The New Reality for Higher Earners
The measures announced in Budget 2025 reflect a deliberate policy choice to raise additional revenue from higher earners and those with significant assets. Whilst the government has kept its promise not to increase headline income tax rates, the combination of frozen thresholds, new caps, and targeted tax rises achieves a similar outcome through less visible means.
For higher earners, the key message is that tax planning becomes more important, not less, in this environment. The changes are significant, but with several years before some measures take effect, there's time to adjust financial strategies accordingly.
