Savings and property tax hiked further
In the 2025 Budget, Rachel Reeves announced new tax rates that would apply to savings and property income from April 2027, set at 22% for basic rate taxpayers, 42% for higher rate taxpayers and 47% for additional rate taxpayers.
Before these rates have even taken effect, Chancellor Healey has pushed them higher, adding a further two percentage points to each band. From 6 April 2027, savings and property income will be taxed at 24% for basic rate taxpayers, 44% for higher rate taxpayers and 49% for additional rate taxpayers.
The higher rates of tax that will apply to savings income further underline the role tax efficiency plays within a sensible investment strategy, and the need to plan carefully to minimise the impact on returns. Already facing a series of legislative changes to tenancy laws, landlords will now see an even larger share of their rental profits subject to income tax, further squeezing margins.
The rates of tax applying to dividends will remain unchanged in the 2027/28 tax year.
ISA U-turn
In a surprising U-turn, Healey announced the planned reduction in the cash element of the Individual Savings Account (ISA) allowance, due to come into effect from 6 April 2027, would not go ahead. Under Rachel Reeves’s earlier plan, those aged under 65 would have seen the Cash ISA limit cut from £20,000 to £12,000.
The ISA allowance therefore stays at £20,000 for all ages, which can be freely split between Stocks and Shares ISAs and Cash ISAs.
In a further announcement, Healey confirmed that Treasury officials will work with the industry to explore further tax-free incentives to help those who have not invested before.
Lifetime ISA replacement
As expected, the Chancellor announced the launch of the “First Time Buyer” ISA from April 2029. The features of the product are likely to be similar to the current Lifetime ISA, which will close to new savers at the same time. In a change to the current Lifetime ISA rules, the 25% penalty that applies where an individual buys a home that exceeds the maximum limit for home purchase (£450,000) will be reduced to 20%, effectively meaning the ISA holder will get back what they put in. The charge for other unauthorised Lifetime ISA withdrawals remains unchanged at 25%.
New Pension Tax Allowance
With the full new State Pension set to exceed the Personal Allowance from April 2027, the Chancellor has confirmed that pensioners whose income is limited to, or just exceeds, the new State Pension will receive a Pension Tax Allowance. This allowance will be calculated by applying basic rate income tax (20%) to the difference between the full new State Pension (£13,036 from 6 April 2027) and the Personal Allowance (£12,570). For individuals with total income above the value of the full new State Pension, the Pension Tax Allowance tapers at a rate of £1 for every £3 of income above this level. If total income exceeds £13,319, no Pension Tax Allowance will be available.
Reduction in BADR
The lifetime limit for Business Asset Disposal Relief (BADR), which reduces Capital Gains Tax (CGT) payable on the sale of qualifying business assets, will be reduced from £1m to £500,000 from 6 April 2027. This further reduction in the lifetime limit, together with the increases in the rate that applies to qualifying disposals announced in previous Budgets, now means that the relief provides only modest benefits for business owners who are selling their business.
New CGT Founders’ Relief
Alongside the reduction in BADR, a new Founders’ Relief will reduce the rate of CGT paid to just 10% for individuals who start “high growth, innovative” businesses, in the event of their sale. The new relief will be available from 6 April 2027 and will be subject to a £10m lifetime gains limit. The relief will be available to business founders who hold 25% of the share capital and have done so for at least five years before disposal. It will, however, only be available where businesses have achieved substantial compound growth in turnover or headcount or have incurred qualifying expenditure on research and development. A consultation process will conclude on 30 November 2026, and the rules may, therefore, be subject to revision.
Removal of two-year rule for pension death benefits
In a welcome move, the government will remove the tax charges that apply when pension death benefits are paid more than two years after the pension scheme administrator first knew, or could reasonably have been expected to know, of the death of the member. The change, effective immediately, will avoid tax charges arising when pension administrators fail to pay on time because of administrative delays.
Minor pension legislation changes
Aside from the removal of the two-year rule for pension death benefits, HMRC will adjust the process for collecting tax due on lump sum death benefits where the Lump Sum and Death Benefit Allowance has been breached. These changes will preserve income tax relief where Inheritance Tax (IHT) and income tax are payable on the same pension assets from 6 April 2027.
No changes have been announced that affect pension tax relief, allowance levels or Tax-Free Cash amounts. This is welcome, given the substantive changes to pension rules from 6 April 2027, where unused pension funds and death benefits are brought within the value of a deceased person’s estate for IHT purposes, that have already been announced.
CGT and IHT unchanged
Whilst the subject of intense speculation in the run-up to the Budget, there has been no increase in the rates of CGT that apply for basic and higher rate taxpayers. Likewise, the IHT Nil Rate Bands remain unchanged.
Reassess your position
The further hikes in savings and property income tax, and rollback of the previously announced changes to the ISA rules, will reinforce the need to consider the impact of tax on investment returns as we head into the next tax year.
Our experienced advisers can provide independent advice, tailored to your personal circumstances, to ensure tax efficiency across your investments, and help you plan for retirement or pass wealth down across generations. Speak to one of our team to start a conversation.
