How Does the UK Budget 2025 Affect Investors?
The Chancellor's second Budget brings significant changes for UK investors, with measures designed to close the gap between tax on earned income and investment returns. From dividend tax rises to ISA reforms, these changes will affect how millions of people save and invest.
The headline changes for investors
The Budget introduces several measures that will directly impact investment returns:
Dividend taxation From April 2026, dividend tax rates will increase by two percentage points. Basic rate taxpayers will pay 10.75% (up from 8.75%), while higher rate taxpayers will pay 35.75% (up from 33.75%). The additional rate remains unchanged at 39.35%. The £500 dividend allowance stays in place, though this remains at its significantly reduced level following previous cuts.
For context, someone earning £4,000 in dividends annually would previously have paid £306.25 in tax as a basic rate taxpayer. Under the new rates, this rises to around £377, an additional £70 per year.
Savings income tax Savers face a similar increase from April 2027. Tax on savings interest will rise by two percentage points across all bands, creating new rates of 22% (basic), 42% (higher) and 47% (additional). The personal savings allowance, currently £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, remains unchanged.
According to the official Budget document, over 90% of taxpayers will continue to pay no savings tax at all due to these allowances.
Property income taxation The Budget creates separate tax rates for property income for the first time. From April 2027, landlords and property investors will pay 22% at the basic rate, 42% at the higher rate and 47% at the additional rate. These new rates apply to rental income and other property-related earnings.
The government's stated rationale is to narrow the gap between taxes paid on work and taxes paid on investment income. Employees pay National Insurance contributions on their earnings, whilst those with investment income do not.
ISA reforms: encouraging investment over cash
Perhaps the most significant structural change affects Individual Savings Accounts. From April 2027, the annual ISA allowance remains at £20,000, but for those under 65, only £12,000 of this can be held in cash ISAs. The remaining £8,000 must be invested in stocks and shares ISAs.
Those aged 65 and over retain the full £20,000 cash ISA allowance, recognising that older savers may prefer lower-risk options as they approach or enter retirement.
| What's changing | Current rule | New rule (from April 2027) |
|---|---|---|
| Total ISA allowance | £20,000 | £20,000 (unchanged) |
| Cash ISA limit (under 65) | £20,000 | £12,000 |
| Cash ISA limit (65+) | £20,000 | £20,000 (unchanged) |
| Stocks & shares ISA | £20,000 | £8,000 minimum for under-65s |
This reform aims to channel more retail investment towards UK equities, though it has sparked debate about whether it will genuinely shift behaviour or simply reduce tax efficiency for cautious savers.
Pension changes: the salary sacrifice cap
From April 2029, a £2,000 annual cap will apply to pension contributions made via salary sacrifice arrangements that are exempt from National Insurance. Contributions beyond this limit will be subject to standard NI rates.
Salary sacrifice allows employees to exchange part of their salary for employer pension contributions, reducing both income tax and National Insurance liabilities. This has been a valuable tool for boosting retirement savings, particularly for higher earners.
The government estimates this measure will protect 74% of basic rate taxpayers currently using salary sacrifice, while raising £4.7 billion by 2029-30. However, it represents a significant change for those contributing larger amounts to their pensions through this route.
Positive measures: stamp duty relief for UK listings
Not all the news is challenging for investors. The Budget introduces a three-year stamp duty exemption for newly listed companies on UK stock exchanges. Investors won't pay the usual 0.5% stamp duty when purchasing shares in companies for the first three years after they list.
This measure aims to make London more competitive with international markets like New York, where stamp duty doesn't apply to share purchases. The relief could help attract more companies to list in the UK and support valuations for newly public companies.
The government has also committed to reviewing stamp duty on shares more broadly to ensure UK capital markets remain competitive.
Capital gains tax adjustments
The Budget makes targeted changes to capital gains tax reliefs. Most notably, relief on disposals to Employee Ownership Trusts will reduce from 100% to 50% from April 2026. This scheme, which allows business owners to sell shares to employee trusts without paying CGT, has grown significantly more expensive than originally projected.
The main capital gains tax rates remain unchanged following increases announced in the previous Budget.
What should investors do?
These changes create several practical considerations for investors:
Maximise tax-efficient wrappers ISAs and pensions remain tax-free for investment growth and income. The dividend and savings tax rises make these wrappers even more valuable. Both spouses can each use their full £20,000 ISA allowance, potentially sheltering £40,000 annually from tax.
Consider timing For those holding investments outside ISAs, the period before April 2026 offers an opportunity to reorganise portfolios. This might include transferring investments to a spouse in a lower tax band or using the capital gains tax annual exemption (currently £3,000) to move assets into ISAs, a strategy known as 'bed and ISA'.
Review income strategies Investors relying on dividend income may need to reassess their approach. This could mean focusing more on total return rather than income, or ensuring maximum use of tax-efficient accounts. Those with dividend income should note that the £500 dividend allowance has already fallen significantly from £5,000 just a few years ago.
Assess salary sacrifice contributions If you're contributing more than £2,000 annually to your pension via salary sacrifice, you have until 2029 to consider alternative arrangements. Some employers may adjust their pension schemes in response to these changes.
Don't ignore the positive The stamp duty relief for newly listed companies could create opportunities for investors willing to back UK businesses at IPO. Research suggests this measure could help stimulate demand for UK equities and support valuations.
Understanding the bigger picture
The Budget's investment-related measures form part of a broader strategy to increase tax revenues whilst encouraging specific behaviours, namely shifting money from cash into investment and supporting UK capital markets.
The Treasury projects these personal tax measures will raise £14.9 billion by 2029-30, with around two-thirds of the revenue coming from the wealthiest 20% of households. However, the changes will affect a broad spectrum of investors, from small shareholders to business owners who pay themselves via dividends.
For many investors, the key message is clear: tax-efficient investing through ISAs and pensions becomes even more important. The annual ISA allowance, unchanged since 2017-18, represents a valuable opportunity to shelter investments from these higher taxes.
Investors should also note that previous changes to capital gains tax and inheritance tax announced in the 2024 Budget continue to take effect as planned, including reforms to agricultural and business property relief from April 2026.
Planning ahead with professional advice
Tax planning has become increasingly complex, with multiple changes taking effect at different times. The dividend tax rise takes effect in April 2026, ISA reforms in April 2027, and the salary sacrifice cap not until 2029.
Anyone with significant investment income outside tax-efficient accounts, business owners paying themselves via dividends or higher earners using salary sacrifice for pensions should consider reviewing their financial arrangements. The government's stated aim is to ensure that income from assets contributes more fairly to tax revenues, bringing it closer to the treatment of earned income.
For most everyday investors using ISAs and workplace pensions, the core message is reassuring: these accounts remain highly tax-efficient vehicles for long-term saving and investing. The changes announced in this Budget make them more valuable than ever.
