After months of speculation, the UK Budget finally landed, bringing a raft of changes that will impact business owners and savers. Tim Woodgates, Tax Partner at Chartered Accountants Moore looks at the major tax changes announced, and what individuals and businesses can do to optimise their tax position ahead of the new rules coming into effect.
In her second Budget, Chancellor Rachel Reeves, despite her manifesto promise not to increase income tax, introduced income tax increases on dividends and savings income, and a new income tax rate for property income. There were also changes to ISA rules and the pension salary sacrifice scheme.
Dividend tax
Dividend tax will increase by 2%, with the basic rate rising from 8.75% to 10.75% and the higher rate from 33.75% to 35.75%. The additional rate for dividends will remain at 39.35% so the changes won’t affect individuals with taxable income over £125,140.
These increases apply from April 6, 2026, so those with taxable income below the additional rate band may want to increase distributions before the changes come into force. However, with the bandings unchanged, care needs to be taken to prevent an extra dividend being taxed in a higher band or leading to a reduction in the personal allowance.
Longer term, limited company owners may want to do some additional remuneration planning to look at the amount they’re taking in salary versus dividends. This was already a complex area of tax planning and the increase in the dividend tax complicates things further. For some, it may even be the case that a limited company is no longer the most tax-efficient solution and that an alternative business structure may be a better option.
Tax on savings income and ISA reform
From April 2027, tax on the income from savings will also increase across all bands. The basic rate will move from 20% to 22%, the higher rate from 40% to 42% and the additional rate from 45% to 47%.
Basic rate taxpayers can earn up to £1,000 of savings interest tax-free (£500 for higher rate taxpayers) so these changes only affect those with significant savings.
At the same time, the cash ISA limit is reducing to £12,000 for savers under the age of 65. The overall annual limit of £20,000 remains the same, with savers having the option to invest the remaining £8,000 in a stocks and shares ISA.
This won’t have any impact on savings already contributed to a cash ISA up until this point, so savers have time to make the most of the existing rules and top up their cash ISA before April 2027.
Property income
There was more bad news for property landlords with the introduction of separate tax rates for property income. These new rates will mirror the updated savings income rates: a property basic rate of 22%, a property higher rate of 42% and a property additional rate of 47%.
There is some relief that these increases will not apply until April 2027 and that mortgage interest relief will be at the new property basic rate of 22% instead of remaining at the current 20% rate.
Pension salary sacrifice schemes
From April 2029, the ability to make salary sacrifice contributions into a pension are being limited to £2,000 per year. Any contributions into a pension above that limit will be subject to both employees’ and employers’ National Insurance (NICs). (Ordinary employer pension contributions will continue to be exempt from NICs.)
Salary sacrifice allows employees to give up part of their salary or bonus in exchange for employer pension contributions and is widely used because it provides NIC savings for both employees and employers.
The government’s decision to cap relief rather than abolish it entirely will introduce new levels of complexity, especially where earnings fluctuate due to overtime, bonuses or commission. The changes will make salary sacrifice schemes less attractive to employers and many will cease them altogether.
There is some light relief in that the 2029 implementation date means employers and employees have time to prepare and adjust. Those already using salary sacrifice can continue benefiting from savings and maximise contributions ahead of April 2029.
Take time for careful tax planning
While Budget headlines often sound urgent, the reality is that most announced changes won’t take effect immediately. This breathing space allows individuals and businesses time to plan properly. Seeking professional advice is always recommended to ensure any decisions are right for your unique circumstances rather than being driven by media hype.
Contact Moore on 01536 461900 or visit the Moore website.
