It’s the morning after the day before and our Director Mary Pat McFarlane was joined by Ed Marriage (Tax Manager with Henderson Loggie) in our Insta Live, discussing the main takeaways from yesterday’s ‘tax and spend’ UK Budget – one, they both agreed, was probably what had been anticipated.
Income Tax Changes and Fiscal Drag
The conversation began by addressing ‘fiscal drag’, a notable outcome of freezing tax thresholds as wages rise with inflation – in other words, as people’s incomes increase, more are pulled into higher tax brackets which results in a larger proportion of their earnings being taxed at higher rates. Out of the £26 billion expected to be raised by yesterday’s budget, approximately £8 billion is anticipated to come from this fiscal drag. Although Scotland has control over some income tax rates, the thresholds set by the UK government apply across the whole country. This shift ensures that the effect of fiscal drag will be felt by nearly everyone, as many will find they’re paying more taxes due to these stagnant allowances.
Dividend, Savings and Property Income Taxes
The next headline change discussed was the rise in tax rates for dividends, property and savings income. Dividend tax rates for basic and higher-rate taxpayers will increase by two percentage points from April 2026, with the dividend allowance frozen at £500 per person – this allowance was £5,000 when it was originally introduced. Savings income faces a similar hike, with the basic rate moving from 20% to 22% in April 2027. The personal savings allowances (£1,000 for basic rate taxpayers and £500 for those on a higher rate) are unchanged but will be eroded by inflation – fiscal drag playing its part again. Property income tax will also be increased by 2p in the pound from April 2027; this won’t immediately affect Scottish landlords, however, as Scotland retains control over this tax. Worth keeping an eye on the Scottish Budget on 13 January 2026 to see if the Scottish Government follows suit.
Pension and National Insurance Reforms
From 2029, National Insurance (NI) will apply to pension salary sacrifice contributions above £2,000. This move will particularly impact higher earners and/or those increasing their pension contributions, with some facing an estimated annual rise of £400 or more in NI. Employers too will be affected, having already absorbed an increase in employer NI contributions up to 15%. So, as the employers’ costs rise, this change could discourage companies from matching higher pension contributions.
Inheritance Tax Planning
The much-anticipated radical changes to inheritance tax (IHT) did not materialise, with allowances now frozen until 2030. From April 2027, pensions will be included in IHT calculations though we’ve still to hear how that will be implemented. One key announcement here was making the £1 million limit for agricultural and business property relief transferable between spouses (beginning April 2026) so offering more flexibility to families and business owners for estate planning.
Capital Gains Tax Updates
Contrary to speculation – again – the main capital gains tax (CGT) rates saw no increases. The CGT annual exemption remains at £3,000; much reduced from earlier levels. The primary change involved disposals to employee ownership trusts with the relief here dropping from 100% to 50%. While this makes it still attractive for owners to consider such disposals – for example, selling your business to an employee trust – it will complicate the admin surrounding these transactions.
Other Taxes: Sugar, Gambling and Electric Vehicles
The sugar tax has broadened to include milk-based drinks, with lower sugar thresholds applied, so it’s likely to affect more products such as flavoured lattes. Gambling tax changes include removing certain taxes from bingo and horse racing while increasing online gambling duties to 40%, something estimated to raise £1 billion. Electric vehicle users will be subject to a 3p per mile levy for electric vehicles and 1.5p per mile for hybrid vehicles (from April 2027) an unexpected surprise for those who invested in green transport at the prospect of future tax advantages.
Conclusion
Fiscal drag and diminished allowances will broadly increase everyone’s tax liability. Our experts advised those concerned – particularly small business owners, landlords and those earning above average income levels – to seek advice and recalculate their tax strategies in good time before the announced changes become law.