Following drastic tax changes last year, speculation was once again widespread in the run up to Chancellor Rachel Reeves’ second Autumn Budget (even more so with the OBR’s fiscal report having been leaked half an hour ahead of the Chancellor’s speech).
With Britain facing a fiscal gap (now a “£28.8 billion black hole”), as well as pressure to finance welfare, defence and other shortfalls, the question has not been whether the Chancellor will raise taxes, but rather, which taxes she will target.
Today marks an end to the speculation, with Rachel Reeves announcing how she will fund her spending commitments. This article highlights the key changes that will affect our clients.
Main announcements
Increase to Income Tax on property, savings and dividend income
Following Labour’s manifesto promises not to raise taxes for working people, the Chancellor has targeted her tax increases on passive income, specifically property, savings and dividends. The changes announced are:
- An increase to the basic and higher rate of tax on dividends by 2 percentage points. This will come into effect from April 2026.
- An increase to the basic, higher and additional rate of tax on savings income by 2 percentage points. This will come into effect from April 2027.
- An increase to the basic, higher and additional rate of tax on property income by 2 percentage points. This will come also into effect from April 2027.
Council Tax surcharge on high value properties
The introduction of a new high value council tax surcharge (also referred to as a “mansion tax”) will result in those owning properties valued at £2 million or more being liable to pay an annual charge in addition to their current council tax charges, from April 2028.
There will be four tax brackets with properties valued at £2 million and above liable to charge. Both the tax bands and flat rates of tax (currently proposed to be between £2,500 to £7,500 per annum) will be uprated annually by inflation, as measured by the Consumer Price Index (“CPI”).
Salary sacrifice towards pensions
One of the ways that employees can make pension contributions is via salary sacrifice. This means that the individual reduces their salary and this reduction in their salary is paid into their pension. The advantage of doing this is that employers’ and employees’ National Insurance Contributions (“NICs”) are not levied on the amount of salary which is sacrificed. From April 2029, the pension contributions made via salary sacrifice that will be exempt from NICs will be restricted to £2,000 per year. Pension contributions made via salary sacrifice will continue to be exempt from income tax charges.
Freeze to the personal tax bands and thresholds
Predictably, the Chancellor has announced a further extension of the freeze on personal tax and employer National Insurance Contribution (“NIC”) thresholds by three years, from April 2028 to the tax year ending April 2031.
Other tax changes
Cash ISA limits reduced
From April 2027, savings into a Cash Individual Savings Account (“ISA”) will be limited to £12,000 per annum for those who are aged 65 years old or under. This reduces the amount currently able to be saved in Cash ISAs by £8,000 each year. However, the overall ISA limit will remain at £20,000 per annum, encouraging increased investment in stocks and shares, such as via Stocks & Shares ISAs, rather than savings.
Enterprise Investment Scheme (“EIS”) and Venture Capital Trust (“VCT”) schemes
From April 2026, the legislation governing the EIS and VCT schemes will be revised. While there will be increases in the overall investment limit for companies, and changes to the eligibility criteria to make it easier for companies to get investment, the rate of tax relief available for investors in VCT schemes will be reduced from 30% to 20%.
Corporation Tax filing penalties
Companies that fail to file Corporation Tax (“CT”) returns by the required deadlines will incur increased charges by virtue of doubling the level of fixed late filing penalties. The measure will have effect for CT returns with a filing date on or after 1 April 2026.
Corrections and revisions announced in the 2024 Budget
The 2024 Autumn Budget introduced changes to Inheritance Tax (“IHT”) policies for business assets, agricultural property and trusts settled by what are now deemed to be long-term residents. This Budget has aimed to correct some of the finer points of those reforms while maintaining the overall application of those tax changes.
- As a reminder, from 6 April 2026 assets qualifying for 100% Agricultural Property Relief and Business Relief will be subject to a £1 million allowance. After this threshold, the relief will reduce to 50% on qualifying assets. Initially, the £1 million threshold was non-transferrable between spouses.
- However, today saw the announcement that to the extent that the £1 million allowance is not utilised on the chargeable estate at death, the surviving spouse can utilise this against their estate upon their passing. This effectively gives each married couple an allowance of £2 million to offset against qualifying assets on their passing.
- To mitigate potential tax avoidance relating to agricultural property and land, the scope of IHT has been extended to include the value of agricultural land and property held through non-UK companies or similar bodies that would otherwise be considered non-UK situs.
- From 6 April 2025, trusts that had previously been outside the scope of UK IHT were brought within charge if the Settlor was long-term resident for UK tax purposes. The IHT charge payable by the Trustees on these assets has been capped to £5million over the lifetime of the trust.
Other changes of note
Non-resident Capital Gains Tax (“CGT”)
Non-UK tax residents have been subject to UK CGT on the disposal of UK land and property since April 2015. The rules have been extended periodically and currently affect the direct disposal of interests in UK land and property, and the disposal of “property rich entities”. Property rich entities are essentially companies who derive 75% or more of their value from UK land and property, where the shareholder owns at least 25% of the equity interest.
The existing definition of property rich entities is to change with immediate effect for Protected Cell Companies (“PCC”), such that going forward each cell of a PCC will need to be considered separately. This will align the tax treatment for clients that have invested in UK properties via PCCs, rather than personally or via a more traditional corporate entity.
Abolition of notional dividend tax credit for non-UK residents
In a minor change, the Government have announced that they will align the position for tax credits on dividends paid to non-residents with that of UK residents. Going forward, non-residents who choose for their UK dividend income to be assessed to UK tax (rather than being disregarded), will no longer be entitled to a 20% credit against the UK tax payable on the dividend.
Non-residents will, however, still be able to “disregard” their dividend income from being assessed to UK tax (albeit with the loss of their personal allowance being available to reduce their remaining taxable income).
Post departure trading profits
The Temporary Non-Residence Rules (“TNR”) are anti-avoidance rules designed to catch certain individuals that receive specific types of income or gains, often from close companies, during a period of temporary non-residence, on their return to the UK. It has been announced these rules will now also apply to distributions or dividends made from “post departure profits”, i.e., those that have accrued in the company after the individual has left the UK.
Contact us
If you would like to discuss any of the above in more detail, please contact us for further advice.
Nick Tayler — Associate Tax Director — Mark Davies & Associates Ltd