UK Budget 2025: Key Points and Takeaways

Chancellor Rachel Reeves delivered the Autumn Budget on 26 November 2025 with a message of "tough choices" amid the UK's highest tax burden since the 1940s. The headline announcements include frozen income tax thresholds extended until 2031, a new £2,000 cap on salary sacrifice pension contributions, reduced cash ISA limits for under-65s, and increased taxes on dividends, savings, and property income. On the positive side, the state pension rises by 4.8%, minimum wage workers receive meaningful increases, and the controversial two-child benefit cap will be abolished.

Behind these measures lies a challenging fiscal reality: national debt exceeding £2.8 trillion (94.5% of GDP), debt interest payments now surpassing £100 billion annually, and public services requiring significant investment after years of tightening.

The fiscal backdrop: why these measures are happening now

Understanding the Budget requires grasping the UK's current economic position. The country now pays more in debt interest than it spends on education, defence, or transport, a direct consequence of pandemic borrowing (£313 billion in 2020/21 alone) and energy crisis support (£183 billion over four years).

The numbers tell a stark story. UK debt has nearly tripled since the start of the century, sitting at levels not seen since the early 1960s when the country was still paying off Second World War obligations. Meanwhile, productivity growth has slumped from 2% annually pre-2008 to just 0.6% over the past decade. Had productivity continued at pre-financial crisis rates, GDP per capita would be £15,000 higher today.

The OBR's Economic and Fiscal Outlook upgraded 2025 growth forecasts to 1.5%, making the UK the third-fastest growing G7 economy, but this comes alongside an inflation forecast of 3.5% for 2025, higher than previously expected. The tax burden will reach an all-time high of 38.3% of GDP by 2030-31, up from 36.9% before the pandemic.

Income tax thresholds frozen for three more years

The most significant, and stealthy, tax change affects millions of workers through "fiscal drag." Personal tax thresholds will remain frozen until April 2031, three years longer than previously planned.

The current thresholds remain unchanged: £12,570 personal allowance, £50,270 higher-rate threshold, and £125,140 additional-rate threshold. As wages rise with inflation while thresholds stay static, more of your income falls into higher tax bands. The OBR estimates this will pull 780,000 additional people into paying basic rate tax, 920,000 more into the higher rate, and 4,000 into the additional rate by 2030-31.

The practical impact varies by salary. Someone earning £40,000 will pay roughly £321 more annually compared to thresholds rising with inflation; at £90,000, that increases to £2,600 extra; at £100,000, the additional burden reaches £4,043. This change raises £8 billion annually by 2029-30, far more than any announced tax increase, without technically breaking the government's pledge not to raise income tax rates.

Public sector workers face particular pressure from these frozen thresholds. NHS staff and teachers receiving recent pay rises find themselves pushed into higher tax bands without threshold adjustments to match. A newly qualified teacher earning £31,650 outside London already pays higher-rate tax on any additional income above £50,270, while senior nurses and experienced teachers commonly fall into salary ranges where fiscal drag has the greatest proportional impact. Combined with changes to pension arrangements and other Budget measures, public sector workers face a complex shift in their take-home pay over the coming years.

Further Reading:

• How Does the UK Budget 2025 Affect NHS Staff?
• How Does the UK Budget 2025 Affect Teachers?

Salary sacrifice cap: pensions become less tax-efficient

From April 2029, the popular salary sacrifice arrangement for pensions will be significantly restricted. Only the first £2,000 of salary sacrifice pension contributions will be exempt from National Insurance, with both employer and employee NI applying to amounts above this cap.

Currently, salary sacrifice allows employees to reduce their gross salary with the equivalent paid into their pension, saving both employer NI (15%) and employee NI (8% or 2%). This arrangement costs the Treasury an estimated £8 billion annually by 2030, up from £2.8 billion in 2017, with most benefits flowing to higher earners.

For most workers earning under £40,000 with standard auto-enrolment contributions, the impact will be minimal as the cap protects 74% of basic rate taxpayers using salary sacrifice. However, those maximising pension contributions face meaningful losses. A higher earner contributing £10,000 through salary sacrifice would pay an extra £160 in employee NI and their employer an additional £1,200 annually.

Important clarification: income tax relief on pension contributions remains unchanged. The cap specifically targets National Insurance savings. Other salary sacrifice schemes, including cycle to work, company cars, and childcare vouchers, are not affected by this specific measure.

However, the long lead time suggests there are genuine questions over the roll-out of the measure. Read more: Will Rachel Reeves' 2025 Budget Salary Sacrifice Cap Actually Go Ahead?

ISAs: cash savers under 65 face reduced allowances

The Government is fundamentally reshaping ISA rules to encourage investment over cash savings. From April 2027, the cash ISA allowance drops from £20,000 to £12,000 for savers under 65, the first reduction since 2017.

The overall £20,000 ISA allowance remains, but under-65s must now allocate at least £8,000 to stocks and shares investments rather than cash. Savers aged 65 and over retain the full £20,000 cash ISA allowance, recognising older savers' preference for lower-risk, accessible savings.

The Lifetime ISA remains unchanged despite widespread criticism of its punitive withdrawal penalties. The property price threshold stays at £450,000 (unchanged since 2017 despite house price inflation), and the 25% early withdrawal charge, effectively a 6.25% loss on your own money, continues. The proposed "British ISA" offering an additional £5,000 for UK company investments has been officially abandoned.

For practical purposes, this means under-65s wanting full tax-free savings protection must become investors whether they want to or not. Major financial providers including Hargreaves Lansdown, HSBC, and Vanguard are launching educational hubs to help nervous first-time investors navigate the shift.

Further Reading: How Does the UK Budget 2025 Affect ISAs?

Dividend, savings, and property income face higher rates

Three separate but related tax increases affect investment and rental income from April 2026-2027:

Dividend tax (from April 2026): Basic rate rises from 8.75% to 10.75%; higher rate from 33.75% to 35.75%. The additional rate stays at 39.35%, and the £500 dividend allowance remains unchanged. Company directors taking income as dividends will pay roughly £200 more per £10,000 of higher-rate dividends.

Savings and property income tax (from April 2027): For the first time, separate rates apply to savings interest and rental profits above standard income tax rates. Basic rate increases to 22%, higher rate to 42%, and additional rate to 47%, all 2 percentage points above standard rates.

The Personal Savings Allowance (£1,000 for basic rate taxpayers, £500 for higher rate) remains unchanged, meaning over 90% of taxpayers will continue paying no tax on savings interest. However, landlords with taxable rental profits face meaningful increases, though finance cost relief (mortgage interest) rises proportionally to 22%.

Further Reading:

• How Does the UK Budget 2025 Affect Higher Earners?
• How Does the UK Budget 2025 Affect Investors?
• How Does the UK Budget 2025 Affect Landlords?

The mansion tax: high-value homes face council tax surcharge

From April 2028, properties valued over £2 million will face an annual surcharge alongside normal council tax. This "High Value Council Tax Surcharge" creates four bands:

• £2m to £2.5m: £2,500 annually
• £2.5m to £5m: £2,500 to £7,500 (graduated)
• Over £5m: £7,500 annually

The surcharge will be uprated with CPI inflation each year and applies to roughly 100,000 properties across England, less than the top 1% of homes. Revenue goes to central government rather than local authorities and is expected to raise £400 million by 2029-30.

Critics note that in London and the South East, many £2 million-plus properties are terraced family homes rather than mansions. In London, this affects a significant number of ordinary family homes in desirable postcodes. The Valuation Office Agency will conduct revaluations based on 2026 prices, creating uncertainty for properties near the thresholds during the intervening years.

Minimum wage: meaningful increases for lower-paid workers

The National Living Wage and National Minimum Wage increase from 1 April 2026 with particularly generous rises for younger workers:

A full-time worker on the National Living Wage gains approximately £900 annually, while 18-20 year olds, receiving the largest percentage increase, gain around £1,500. The Government intends to eventually abolish the separate 18-20 rate, creating a single adult rate.

These increases affect 2.7 million workers directly, with particular impact in retail, hospitality, social care, and logistics sectors. However, they remain below the voluntary Real Living Wage (£13.45 outside London, £14.80 in London), which some employers choose to pay.

Two-child benefit cap abolition lifts families from poverty

In one of the Budget's most significant welfare changes, the two-child limit on Universal Credit and Child Tax Credit will be abolished from April 2026. This policy, introduced in 2017, restricted the child element (worth £3,514 per child annually) to the first two children in a household.

The numbers are striking: 1.6 million children are currently affected by the cap, with 560,000 families set to see benefit increases. Affected families will gain an average of £5,310 annually by 2029. The OBR estimates the change will lift 450,000 children out of poverty and reduce the depth of poverty for 700,000 more.

The measure costs approximately £3 billion by 2029-30. Child poverty campaigners called it the most cost-effective way to reduce child poverty, noting that 59% of affected families have at least one parent in work.

Further Reading: Child benefit and the two-child cap: what's changing?

State pension rises 4.8% under preserved triple lock

The Government confirmed the triple lock mechanism, guaranteeing the state pension rises by the highest of inflation, average earnings, or 2.5%, will be maintained for this Parliament. Average earnings growth of 4.8% triggered the largest of the three measures.

From April 2026:

• Full New State Pension rises to £241.30 weekly (£12,548 annually), an increase of £575
• Full Basic State Pension rises to £184.90 weekly (£9,615 annually), an increase of £440

Over 13 million pensioners benefit from this increase. However, a crucial wrinkle emerges: the full New State Pension (£12,548) now sits just £22 below the personal tax allowance (£12,570). With tax thresholds frozen until 2031 while pensions continue rising, many pensioners with even small additional income from savings interest, part-time work, or private pensions will become income taxpayers for the first time.

Further Reading: How Does the UK Budget 2025 Affect Pensioners?

Drivers and EV Owners

The Budget introduces significant changes to motoring costs that will affect both traditional vehicle drivers and electric vehicle owners over the coming years. The most notable measure is a new pay-per-mile system for electric vehicles beginning in April 2028, alongside phased increases to fuel duty starting September 2026.

Electric vehicle owners will face a new mileage-based charge called eVED (Electric Vehicle Excise Duty) from April 2028, requiring EV drivers to pay 3p per mile whilst plug-in hybrid owners pay 1.5p per mile. An average driver covering 8,500 miles annually would pay approximately £255 in 2028-29. Meanwhile, the current 5p fuel duty cut will be gradually reversed, with 1p added in September 2026, then 2p in December 2026, and a further 2p in March 2027, before reverting to annual RPI increases from April 2027.

To offset these changes, the Government has committed an additional £1.3 billion to extend the Electric Car Grant until March 2030, offering up to £3,750 for eligible vehicles. The expensive car supplement threshold for electric vehicles rises to £50,000 from April 2026, while £200 million additional funding will support EV charging infrastructure. A new Fuel Finder app launching in early 2026 will help motorists identify the cheapest forecourt fuel in real time, potentially saving households around £40 annually.

Further Reading: How Does the UK Budget 2025 Affect Drivers and EV Owners?

Key dates to remember

Understanding when changes take effect helps with financial planning:

Looking ahead

Budget 2025 represents a careful balancing act between raising revenue and maintaining economic stability. The Government has avoided headline-grabbing income tax rate increases but achieved similar revenue through fiscal drag and targeted measures on investment income, property, and salary sacrifice arrangements.

For most working households, the frozen tax thresholds will extract more over time than any single announced measure. Higher earners face compounding pressures from salary sacrifice caps, dividend tax increases, and the mansion tax. Meanwhile, lower-income families, particularly those with three or more children, receive meaningful support through the abolished two-child cap and minimum wage increases.

The overarching message is clear: the UK's fiscal constraints require revenue from somewhere, and this Budget spreads the burden across investment returns, property wealth, and tax-efficient pension arrangements while protecting basic rate workers' incomes and pensioners' triple lock. Planning around these changes, particularly maximising ISA allowances before 2027 and reviewing salary sacrifice arrangements before 2029, can help mitigate their impact on your finances.