Written by:
The Investment Committee
Taking the positives, we now expect the Bank of England to cut interest rates sooner rather than later in an attempt to help stimulate growth.
Last year Rachel Reeves fell off the proverbial budget tightrope after about two steps, investors viewing the spending announcements as unproductive, and tax rises as creating poor incentives.
At a high level, this time the Chancellor has seemingly managed to avoid spooking the bond market, whilst announcing some policies that will buy team Starmer some political capital with the backbenchers. The budget was well constructed from a political perspective, in that it managed to deliver some of the parties Welfare changes without spiking inflation, for example, the freezing of some costs (such as rail fares), is offset by increases in minimum wages and the workers’ rights bill. In this regard the budget was focused on keeping the lid on inflation and keeping investors happy, whilst at the same time ticking a lot of Labour MP boxes.
In addition, in the short term this budget should push talks of a leadership challenge back until after the May local elections. For investment markets then, the near-term risk that it would bring in a period of increased political instability appear to have reduced, which is positive news.
However, it’s the longer-term implications for the economy that remain our main focus, and in this regard this was another budget that kicked the can down the road. A ‘buy now and pay later’ budget if you will, and although it succeeded in appeasing markets and MP’s in the short term, it leaves the economy vastly short of forward investment and incentives for growth. The long-term outlook for increased growth and productivity looks muted at best. Consumer confidence is at an all-time low, not helped by deferring the budget to the last week in November. Taking the positives, we now expect the Bank of England to cut interest rates sooner rather than later in an attempt to help stimulate growth. This should help with consumer confidence and hopefully combined with a bit of Christmas cheer, the only way will be up.
Let’s break down and feedback on the main points as we see them.
Income Tax Thresholds & National Living Wage
The freeze on income tax and National Insurance thresholds is being extended by three years until April 2031, effectively acting as a stealth tax that will pull more people into higher tax brackets as wages increase. In addition, for workers aged 21 and over, the National Living Wage will increase by 4.1% to £12.71 per hour from April 2026.
Wages excluding bonus payments are up over 15% since the thresholds were frozen in 2022. The planned extended freeze to 2031 will mean that the 50k threshold at the point in which workers hit 40% tax on earnings is down to 35k pa in real terms.
This move was telegraphed following Reeves decision not to raise income tax. In reality this means her revenue raise will be very effective, though to 2028, though it will be slower to arrive than an immediate increase in income tax.
The increase in the minimum wage whilst welcomed from the context that pay rates should be commensurate with covering increases in living costs, it should also be noted that this has impacts in other area. The average starting salary for a UK graduate is £28k, so just £4k ahead of a minimum wage position, though also inclusive of £60k worth of student loan debt costing £3.5k per annum to repay. The level of graduate unemployment sits at a record high and in this context it is easy to see why.
Whilst this is something we have been discussing with clients for some time, the change to Cash ISA rules reinforces the need to be prudent with your tax-advantaged allowances.
Rental, Savings and Dividend Income
Whilst not strictly breaking their manifesto promise to not raise the rates of the core taxes (Income Tax, National Insurance and VAT), the Chancellor did announce a 2% rise in the tax rates levied against rental income (such as from property), savings income (such as from cash and investment assets not wrapped in an ISA or SIPP for example) and dividend income. The latter will increase from April 2026, whereas the changes to rental and savings income will take effect from April 2027.
The explanation given was to equalise for the fact that National Insurance is not charged on these forms of income.
Overall, this increases the value further of tax shelters such as ISAs and SIPPs, and makes it once again less attractive to generate income from property, investments and business activities.
ISA Changes
The amount under-65s can save tax-free in a cash ISA will be £12,000 per year, down from £20,000, effective from April 2027. This change twinned with the increased tax on savings income aims to raise tax from savers.
Whilst this is something we have been discussing with clients for some time, the change to Cash ISA rules reinforces the need to be prudent with your tax-advantaged allowances. For example, although individual circumstances will differ, it generally doesn’t make sense to hold cash in an ISA. Ideally you want to generate greater returns in the more tax-advantaged wrappers, to make the most of the shelter they provide. Cash in an Isa is essentially a wasted opportunity if you are looking to be as tax efficient as possible.
In addition, the government announced they would review Help to Buy and Lifetime ISAs, with a view to scrapping them and introducing a simpler scheme aimed at helping first time buyers.
Venture Capital Trusts (VCTs) and Enterprise Investment Scheme’s (EISs)
The budget also included significant news for both VCTs and EISs. Whist both schemes have been extended by 10 years, to April 2035, and the qualifying criteria for businesses broadened, the upfront income tax relief received for VCTs will be reduced from 30% to 20% from April 2026.
By widening the investment criteria to include bigger, more established and more profitable businesses, the government hopes to both widen the benefit of Venture Capital Investment to a broader base of businesses and at the same time reduce the risk level associated with VCT investments with the increased diversification that this brings.
One key outcome is that the industry may see an influx of subscriptions in the current fiscal year with the aim of taking advantage of the greater tax relief currently on offer.
Mansion Tax
An annual surcharge on homes worth over £2m will be introduced from April 2028, with higher charges for properties valued over £5m. The charges will be taken through the council tax scheme. This scheme is more about the headlines, as the projected benefit from this is minimal in terms of the aggregate tax raised from this budget. We were hoping for a little more stimulus for the housing market. The Government had suggested some stamp duty breaks prior to the budget, though nothing materialised. The housing market might begin to move forward from what has been one of the slowest quarters of property sales on record.
Pension Salary Sacrifice
From April 2029, tax relief on salary-sacrificed pension contributions will be capped at £2,000 annually, with amounts above this subject to National Insurance contributions.
This is a disappointing announcement for those that benefit from salary sacrifice (earners over 50k pa) though given the timeframe until implementation, it does provide a window of time to make adjustments. Pension savings rates will likely fall as a result as more incentives to save are closed off.
Business and Agricultural Property Relief
One of the core changes from the last budget was the introduction of £1m allowances assets that qualify for Business Relief (BR) and Agricultural Property Relief (APR). Previously these allowances were unlimited, meaning qualifying business and agricultural assets could be passed through the generations Inheritance Tax free.
From April 2026 each individual will have £1m allowances for BR and APR respectively, with assets falling within these allowances nil rated for inheritance tax. Asset values above these thresholds would then be subject to a reduce inheritance tax rate of 20%.
One quirk not announced at the time was the ability for spouses to pass their allowances to each other on first death, as is usually the case with other assets. We think its omission was an error at last year’s budget and this has now been rectified. This is positive news and is now consistent with the inter spousal exemption rules that apply.
Other notable announcements
• Electric Vehicle Tax: A new per-mile road tax for electric and plug-in hybrid vehicles will be introduced from April 2028, set at 3p per mile for EVs and 1.5p for hybrids. Good news for those looking to see a continuation of the combustion engines. Not good for car makers who are already struggling to sell electric cars in sufficient numbers.
• Business Rates and Taxes: Retail, hospitality, and leisure businesses will benefit from permanently lower business rates, funded by higher rates on larger, more expensive properties, like warehouses.
• Two-Child Benefit Cap: The cap on means-tested benefits, which limited payments to a family’s first two children, will be lifted from April 2026, benefitting those with larger families and lower incomes.
• Cost of Living Support: Measures to reduce living costs include an average of £150 off household energy bills from April 2026, a one-year freeze on regulated rail fares, and the continuation of frozen prescription charges. Rail fares have risen every year for the last 30 years. A welcome break then.
• Welfare Reforms: A Youth Guarantee will offer work placements for young people not in education or employment. Reforms to the Motability scheme will also remove luxury vehicles from the options list.
Overall, there is quite a bit to digest here, and naturally our team will be in touch with clients where appropriate over the coming weeks and months to discuss any individual planning implications.
Similarly, if there is anything specific you wish to discuss, as always, we are here at your disposal.
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Our team at Amber River DB Wood includes Chartered financial planners who look after clients across the East Midlands and beyond.
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