In a budget statement set to reshape the financial landscape for millions, Chancellor Rachel Reeves has unveiled a series of measures that will result in higher tax bills for savers, investors, and landlords. The changes target tax-efficient savings accounts, pension contributions, and unearned income, marking a significant shift in the government's approach to personal finance.
ISA Shake-up: A Push Towards Investment
The Chancellor announced a major overhaul of Individual Savings Accounts (ISAs), with the stated aim from the Treasury to "drive better returns for savers, and incentivise investment." While the overall annual ISA allowance remains at £20,000, the specific limit for cash ISAs will be slashed by 40%.
From 6 April 2027, the maximum amount most people can deposit into a cash ISA will be capped at £12,000. This move is explicitly designed to encourage a shift away from cash holdings and into stock market investments, particularly in British companies. However, in a surprise exemption, savers over the age of 65 will retain the original, higher cash ISA limit.
Clampdown on Pension Salary Sacrifice
Another key measure, which had been widely anticipated, is a new cap on salary sacrifice pension schemes. Used by more than 7 million employees, these schemes allow workers to sacrifice part of their salary in exchange for higher employer pension contributions, reducing both their and their employer's National Insurance bills.
The Treasury argued that the greatest benefits from these arrangements are currently enjoyed by higher earners. To "increase fairness," an annual cap of £2,000 will be introduced on the earnings that can be exchanged for pension contributions with a National Insurance exemption. This change will not take effect until April 2029.
The government claims that three-quarters of basic-rate taxpayers using these schemes will be unaffected. However, industry experts have raised concerns. Steve Hitchiner, Chair of the Tax Group at the Society of Pension Professionals, stated the move would "affect the take-home pay of millions of employees" and labelled it a "tax on working people, in spirit if not in name." Analysis from Finder suggests someone earning £50,000 a year could see their take-home pay reduced by £320 annually. The Office for Budget Responsibility estimates the change will raise an additional £4.7 billion in 2029-30.
A 'Tax Raid' on Savings and Investments
Perhaps the most unexpected elements of the budget were direct increases to taxes on income from savings, property, and dividends. The Treasury stated this was necessary to "narrow the gap between tax paid on work and tax paid on income from assets." Critics have described it as a budget "tax raid."
Starting in April 2027, income tax rates on savings interest and rental property income will rise by 2 percentage points. After the change:
- Basic-rate taxpayers will pay 22%
- Higher-rate taxpayers will pay 42%
- Additional-rate taxpayers will pay 47%
Sarah Coles, Head of Personal Finance at Hargreaves Lansdown, called this a "really shocking tax rise for savers," noting that while the Personal Savings Allowance will still protect some interest, many will face a higher bill.
An earlier hike will affect shareholders. From April 2026, dividend tax rates will increase:
- The ordinary rate rises from 8.75% to 10.75%
- The upper rate rises from 33.75% to 35.75%
Coles remarked that this "flies in the face of the government’s desire to encourage investors to hold UK equities." For landlords, Zena Hanks, a partner at Saffery accountancy, warned the property income tax hike could "tighten already thin margins," potentially leading to higher rents or landlords exiting the market. Despite the significant impact, the Treasury maintains that in each case, over 90% of taxpayers will not have income subject to these new charges.
