TaxCalc Blog

Budget 2025 - reaction and analysis

By The TaxCalc Accountancy Team

Chancellor Rachel Reeves delivered her second Budget on Wednesday 26 November 2025, introducing £26.1 billion in annual tax rises by 2029/30. While Labour's manifesto pledge not to increase income tax, National Insurance or VAT for "working people" remained technically intact, a raft of measures will significantly impact your clients' tax planning strategies. Here's the comprehensive update for accountants and their practices.

INCOME TAX AND NATIONAL INSURANCE

Income tax threshold freeze: The silent tax rise

The most significant revenue-raiser continues to be fiscal drag. The personal allowance (£12,570) and higher rate threshold (£50,270) will now remain frozen until 2030/31 – three additional years beyond the previous 2028 deadline. This measure alone will raise £7.6 billion annually by 2029/30.

National insurance contributions (No change)

Employer national insurance now sits at 15% on most earnings above £5,000 per employee, following changes that took effect from 6 April 2025. Employee rates remain at 8% on £12,570-£50,270 and 2% above. These changes have already raised payroll costs significantly, with no relief announced.

DIVIDEND, SAVINGS AND PROPERTY TAXATION

Dividend tax increases hit business owners

From 6 April 2026, dividend tax rates will increase by 2 percentage points across the board:

• Basic rate: 8.75% becomes 10.75%
• Higher rate: 33.75% becomes 35.75%
• Additional rate: Remains at 39.35%

With the dividend allowance already slashed to just £500 annually, this creates a double burden for owner-managed businesses taking profits via dividends.

Abolition of dividend tax credit for non-UK residents

From 6 April 2026, the notional dividend tax credit previously available to non-UK residents on UK dividend income will be abolished. Non-residents will now be treated identically to UK residents for dividend tax purposes, subject to the same 10.75%/35.75%/39.35% rates.

New property income tax rates

From 6 April 2027, separate income tax rates for property will be introduced (England, Wales, and Northern Ireland):

• Basic rate: 22% (vs 20% on other income)
• Higher rate: 42% (vs 40%)
• Additional rate: 47% (vs 45%)

The ordering of reliefs is also changing: from 6 April 2027, income tax reliefs and allowances will be applied first to non-property income, then property, followed by savings and dividends.

Savings income tax changes

From 6 April 2027, savings income tax rates will increase by 2 percentage points across all bands. The personal savings allowance (£1,000 for basic rate and £500 for higher rate taxpayers) will be maintained but no longer offset property or dividend income.

INHERITANCE TAX

Major changes to agricultural and business property relief

Effective from 6 April 2026:

• Combined £1 million allowance at 100% relief for Agricultural Property Relief (APR) and Business Property Relief (BPR)
• Assets exceeding £1m receive only 50% relief (effective 20% IHT rate)
• AIM shares: 50% relief only, not covered by the £1m allowance
• Payment: Can be spread over 10 years interest-free

The £1m combined allowance will be indexed to CPI from 6 April 2031, and all APR/BPR thresholds remain frozen until 30 April 2031.

Pensions brought into inheritance tax

From 6 April 2027, unused pension funds and death benefits will be brought into an individual's estate for IHT purposes.

IHT thresholds frozen until 2030/31

The nil-rate band remains fixed at £325,000 and the residence nil-rate band at £175,000 until 2030/31, with the taper threshold fixed at £2 million. From 6 April 2031, these will increase in line with CPI.

CAPITAL ALLOWANCES

Writing down allowances: Main rate reduction

From April 2026, the main rate for Writing Down Allowances (WDA) on plant and machinery will be reduced from 18% to 14% on a reducing balance basis. The Special Rate Pool WDA (long-life assets and integral features) remains at 6%.

Introduction of a 40% first-year allowance

From January 2026, a new 40% first-year allowance is introduced for companies investing in qualifying plant and machinery in the main pool. Companies can deduct 40% of eligible costs in year one, with the remaining balance entering the main pool for WDAs at the new 14% rate.

Annual Investment Allowance (AIA) and full expensing

The £1 million AIA is retained, providing immediate 100% relief for qualifying expenditure up to this threshold each year. Full expensing also remains available:

• 100% first-year allowance on qualifying main pool plant and machinery (companies only)
• 50% first-year allowance on special rate pool assets

PROPERTY TAXES

The "Mansion Tax" on high-value properties

A new annual charge applies to residential properties valued over £2 million from April 2028:

• £2m-£2.5m: £2,500 annually
• £2.5m-£5m: Graduated up to £5,000
• £5m+: Up to £7,500

Properties in council tax bands F, G, and H (approximately 2.4 million) will be revalued to determine liability. The charge can be deferred until sale or death.

SALARY SACRIFICE AND WORKPLACE BENEFITS

Salary sacrifice pension contributions capped

From April 2029, salary sacrifice pension contributions above £2,000 annually will be subject to both employer and employee National Insurance.

How it works:

• First £2,000: NI-free as currently
• Above £2,000: Subject to 8% employee NI (2% over UEL) and 15% employer NI

Expansion of workplace benefits relief

From 6 April 2026, employers can reimburse employees for eye tests, flu vaccines, and home working equipment with the same tax and National Insurance relief as if providing these items directly. Currently, exemptions only apply to direct provision, creating inconsistency.

Plug-in Hybrid Electric Vehicles (PHEV) benefits-in-kind easement

From 1 January 2025 to 5 April 2028 (retroactively), a temporary easement applies to mitigate PHEV benefit-in-kind tax liabilities due to new emission standards (EU Euro 6e and UN equivalents):

• CO2 emission figure for qualifying PHEVs will be deemed to be nominal (value 1) rather than the actual figure on the registration document
• Vehicles registered on/after 1 January 2025 with CO2 emissions ≥51 qualify

UMBRELLA COMPANIES AND CONTRACTOR COMPLIANCE

Umbrella company PAYE reforms – from 6 April 2026

Responsibility for PAYE compliance shifts from umbrella companies to either:

• The recruitment agency (if one exists in the supply chain), or
• The end client (if contracting directly with the umbrella company)

Joint and several liability applies. If the umbrella company fails to pay PAYE/NICs, HMRC can pursue the agency or end client for the full amount.

TAX COMPLIANCE AND ADMINISTRATION

Making Tax Digital soft landing period

The government has introduced legislation in Finance Bill 2025-26 in relation to Making Tax Digital (MTD) for Income Tax and the new penalty reform regime which means that taxpayers joining MTD in April 2026 will not receive penalty points for late submission of their first four quarterly updates.

Corporation tax late-filing penalties doubled

From 1 April 2026, penalties for submitting Corporation Tax returns late will double.

Current penalties for late CT submission are as follows:

Return late - £100 becoming £200
Return more than 3 months late - £200 becoming £400
Three successive failures, return late - £500 becoming £1,000
Three successive failures, return more than 3 months late - £1,000 becoming £2,000

Tax adviser registration to become mandatory

From May 2026, all tax advisers dealing with HMRC for clients must legally register with HMRC and meet minimum professional standards. This change, legislated in the 2025-26 Finance Bill, is designed to raise industry standards and enable HMRC to exclude non-compliant advisers.

Tax advisers will register digitally (with non-digital options for some) and must confirm compliance, including anti-money laundering requirements, each year. Overseas advisers will face slightly higher registration costs due to evidence and translation needs. Advisers who do not comply will be suspended from acting for clients until compliance is restored.

Enhanced HMRC powers: Tackling tax adviser-facilitated non-compliance

New powers enable HMRC to:

• Request information from tax advisers where there is reasonable suspicion of deliberate non-compliance facilitation
• Issue File Access Notices (FANs) without tribunal approval to expedite information requests
• Impose penalties on advisers based on Potential Loss of Revenue (PLR) from deliberate conduct
• Publish details of sanctioned advisers (with safeguards against exposing personal risk)

Tax advisers will face closer scrutiny. This creates operational risk for those inadvertently providing inaccurate advice. Targetting deliberate conduct, not one-off errors or genuine legal interpretation differences.

Tackling promoters of marketed tax avoidance

New measures strengthen the Disclosure of Tax Avoidance Schemes (DOTAS) regime through:

• Universal Stop Notices (USNs): HMRC can stop promoters using certain channels or financial infrastructure
• Promoter Action Notices (PANs): Restrict information sharing and supply chains
• Connected Parties Information Notices (CPINs): Gather information on those linked to promoters
• Promoter Financial Information Notices (PFINs): Access to promoter finances
• Expanded scope: DOTAS now covers more schemes
• Targeted criminal penalties: On legal professionals designing/contributing to avoidance schemes

Loan Charge settlement opportunity

The government has accepted recommendations from an independent review of the loan charge (which affects approximately 32,000 individuals who used disguised remuneration tax avoidance schemes). A new settlement opportunity, legislated in Finance Bill 2025-26, will substantially reduce outstanding liabilities. Most individuals could see at least 50% reductions, with an estimated 30% able to settle for nothing.

Key features include recalculating amounts based on tax rates when loans were made, applying promoter fee discounts (up to £10,000 per year), adding a flat £5,000 reduction, waiving late payment interest, writing off inheritance tax, and allowing five-year payment plans. The maximum reduction per person is capped at £70,000.

ENTERPRISE AND INVESTMENT RELIEF SCHEMES

Enterprise Management Incentive (EMI) scheme expanded

From 6 April 2026, the EMI scheme limits will expand to allow larger companies and scale-ups to participate. Key changes include increasing the company options limit from £3 million to £6 million, gross assets threshold from £30 million to £120 million, employee count from 250 to 500, and the exercise period from 10 to 15 years.

EIS/VCT Investment Limits Increased

Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) changes:

• Company investment limit: Increased from £5m to £10m (£20m for Knowledge-Intensive Companies)
• Lifetime company limit: Increased from £12m to £24m (£40m for KICs)
• EIS annual investment limit: Remains £1m per investor (£2m if £1m+ in KICs)
• VCT annual limit: Remains £200,000
• VCT income tax relief: Reduced from 30% to 20% (but deferral relief improves)
• Reinvestment relief: Extended to 5 April 2035

VAT MATTERS

VAT relief for business donations of goods to charities

VAT relief on donated goods is being extended from April 2026 to cover goods donated for charitable use (not just resale).

VAT treatment of Private Hire Vehicles (PHVs)

In response to a 2024 consultation, the government will not amend VAT legislation to allow PHV operators to act as agents for tax purposes in all cases, nor will it introduce a new margin scheme or reduced rate for the sector.

The government will legislate to exclude suppliers of private hire vehicle and taxi services from the Tour Operators’ Margin Scheme, except where these are supplied in conjunction with certain other travel services.

CONSTRUCTION INDUSTRY SCHEME

Enhanced HMRC powers to tackle CIS fraud

HMRC has enhanced powers to combat Construction Industry Scheme fraud:

• Direct amendment of CIS deduction claims on Employer Payment Summary (EPS) where fraud suspected
• Material materials cost eligibility test: Only direct purchasers of materials can claim deductions (tightened rules)
• Rolling 12-month expenditure threshold: £3m threshold for deemed contractors
• Failure to prevent fraud offence: New mandatory compliance obligation (similar to criminal finances offences)

CAPITAL GAINS TAX

Capital Gains Tax incorporation relief

From 6 April 2026, individuals, partners, and trustees transferring a business to a company in exchange for shares must claim incorporation relief through their Self Assessment tax return for the year of transfer. The claim will require details of the transaction, tax computations, and business type.

BADR rate increase

As previously announced, Business Asset Disposal Relief (BADR, formerly Entrepreneurs' Relief) CGT rate increases from 14% to 18% on the first £1m of qualifying gains from 6 April 2026.

ELECTRIC VEHICLES AND MOTORING

EV mileage tax announced

From April 2028, electric vehicles (battery EV and plug-in hybrid EVs) will face a pay-per-mile tax:

• Battery EV: 3 pence per mile
• Plug-in Hybrid: 1.5 pence per mile

Implementation details (collection mechanism, exemptions) still under consultation.

First-Year Allowances for zero-emission cars and EV chargepoints

• First-year allowances maintained for qualifying EV chargepoints
• Zero-emission cars eligible for enhanced relief
• Full expensing relief available for qualifying infrastructure

FINAL THOUGHTS FOR PRACTITIONERS

This Budget delivers sustained fiscal pressure across almost all tax types. The cumulative effect of frozen thresholds, dividend rate rises, NI changes, capital allowance reductions, and new compliance burdens means clients will face year-on-year tax increases regardless of income level.

The "fixes" announced (umbrella company reforms, tax adviser standards, anti-avoidance measures) indicate government frustration with compliance levels and tax planning sophistication. While targeting deliberate abuse, these measures increase compliance risk and create barriers for legitimate tax advice.

For accountants, the challenge lies in client communication and proactive planning. The four-year lead times on some measures (salary sacrifice, EV tax) provide planning windows, but only if clients act now. Those who delay will face rushed implementation or missed opportunities.

This analysis is based on Budget announcements made 26 November 2025 and supporting HMRC policy papers. Specific details may change as draft legislation progresses through Parliament. All accountants should verify with primary sources before advising clients on technical matters.