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1. How have the UK’s public finances got to where they are?
The UK’s debt levels have grown substantially in recent years - the UK has had budget deficits in seven out of eight years since records began and there hasn’t been a year in surplus so far this century. The debt pile has steadily increased so that today it stands at around £2.7tn. And that debt doesn’t take into account the £2.6tn in unfunded public sector pension schemes, let alone state pension liabilities. At the same time, the tax take (money raised through taxation) has not gone up as quickly, while higher interest rates have caused increased debt interest
payments — currently £1 in every £10 spent by the government goes on debt interest payments. After the NHS, debt interest payments are the second largest component of government expenditure, above pensions and education.
It’s important to note, the UK is not alone - many other developed nations have seen their debt levels grow too. But against this backdrop and with little appetite to cut spending and the economy growing slowly, taxes were always going to go up in the Budget, the question was which ones?
2. Were there any changes made to inheritance tax (IHT) and if so, what are the implications for IHT planning?
The biggest announcement was the extension to the freeze on the nil-rate (£325k) and residence bands (£175k). The nil-rate band has not increased since 2009 and will result in more estates falling into the IHT net – as of last year 4% of estates were subject to IHT, by the end of the decade this is expected to increase to 10%.
The main implication is more people will have to consider IHT planning, this is especially the case after last year’s change that unused pension pots will form part of estates from April 2027 onwards. The good news is there are almost a hundred reliefs that can be used to help mitigate any liability. Understanding these can be difficult, but a financial planner can help you decide which will be the most effective route to take.
Other than freezing thresholds, there were minor tweaks to changes announced in the 2024 Budget such as allowing any of the £1m allowance for agricultural and business property reliefs that is unused to be transferred to spouses.
No changes were made to lifetime gifting. There had been speculation that the qualifying period for potentially exempt transfers and chargeable lifetime transfers would be extended from seven to ten years. So, individuals hopefully have at least another year to plan within those rules.
3. Has the pension landscape seen more change?
From 6 April 2029, only the first £2,000 of pension contributions through salary sacrifice each year will be exempt from National Insurance Contributions (NICs). Contributions through salary sacrifice, like all contributions within existing limits, will still benefit from tax relief at one’s highest marginal rate of tax. And a reduction in salary, irrespective of whether there is a NIC saving can help preserve child benefit and for those with incomes above £100k help preserve free childcare.
Together with last year’s announcement bringing unused pensions pots within the IHT regime from April 2027 onwards, more than ever advice should be sought on the best way forward.
4. Can you explain what changes were made to ISAs?
From 6 April 2027, the annual ISA cash limit within the overall annual ISA limit of £20,000 will be reduced to £12,000. This applies only to the under 65s.
As several stocks and shares ISAs already offer interest on cash balances, there is nothing stopping people from still sitting in cash and utilising this tax wrapper. There is also the option of money-market funds, which would pay interest at a similar rate to cash.
Despite the change, the ISA remains a highly efficient tax-wrapper and an important financial-planning tool.
5. Unearned income such as savings were targeted, what can savers do?
The chancellor was not able to raise income tax on earned income without (overtly) breaking the Labour Party’s manifesto, so she turned her sights on unearned income such as savings, dividends and property income.
For savings held in deposit accounts, the basic tax rate increases to 22% from 20%, the higher rate to 42% from 40% and the additional rate to 47% from 45%. This will take effect from 6 April 2027. The same changes apply to property income.
For dividends, from 6 April 2026 the ordinary tax rate will rise to 10.75% from 8.75%; and the upper rate to 35.75% from 33.75% (the additional rate is unchanged at 39.35%). Dividends will continue to be tax free if generated through a stocks and shares ISA of course. For business owners, a review of the salary/dividend mix as well as the timing of income realisations could be in order.
While the tax rate on savings has increased, options remain available to savers to maximise returns. These include investing in a portfolio of short-term government debt with small coupons. For example, our Short-term Bond Strategy is designed to minimise the tax on the interest earned while maximising the capital gains tax free status of gilts – low coupon gilts typically trade below their £100 face value allowing investors to buy these at a discount and receive full repayment of the £100 par value when they mature. The majority of the gain on investment is tax free.
Cash ISAs, in which savings are not taxed, are still available, albeit at a reduced level for under 65s. For those who do not currently use their annual Cash ISA allowances, these remain a tax-free option.
6. What are the implications for retired savers?
The increase in savings tax applies to retired savers however those over 65 retain the full £20,000 Cash ISA allowance. The Starting Rate for Savings will be retained at £5,000 for 2026-27 and will stay at this level until 5 April 2031. The more you earn from other income such as wages or pension, the less the starting rate for savings will be.
7. As expected, income tax rates were not raised, but what effect does freezing personal income allowances and thresholds have?
Headline income tax rates were not raised but this does not mean most of us won’t be paying more income tax. That’s because the existing freeze on the personal allowance and higher rate thresholds has been extended by three years to 2031. This is in effect the same as raising income tax rates as fiscal drag will mean more people will pay income tax and more people will move into the higher tax brackets – taxation by stealth! We estimate that had the personal allowance been increased in line with inflation each year between April 2021 (when it was first frozen), it would be
around £15,500 compared to £12,570 today and £18,000 by 2031.
The bottom line is more people will be paying more income tax. As with IHT, reliefs, allowances and wrappers exist that can be used to manage your income in a tax-efficient manner. For example, wrapper selection can be key in determining how much tax you pay. Alternatives to direct ownership include holding wealth in offshore bonds or a corporate structure. Once again, a financial planner can help advise here.
8. What changes were made to capital gains tax (CGT)?
Following last year’s increase in CGT rates, there were no headline changes this time round. Having said this, the CGT rate for Business Asset Disposal Relief and Investors’ Relief will increase to match the main lower rate of 18%. This will take effect from 6 April 2026. Business owners should consider the timing of any disposals and their review succession/exit strategies following the change.
9. How did markets react - did they think the budget plans are credible?
Gilt markets reacted well to the chancellor’s commitment to fiscal responsibility and the more than doubling in headroom she has given herself to £22bn from £9bn. Gilt yields trended lower and the chancellor will be hoping they continue to do so.
But there was very little to improve the growth outlook which remains weak. Short term, gilt markets were satisfied but the medium-term issue of kickstarting growth remains. Growth after all was what the government was banking on to fund spending on public services, not through raising taxes which are already at a historically high level.
One way to gauge the tax burden is via the Adam Smith Institute’s Tax Freedom Day (TFD). This is the day of the year when the average person stops paying tax. In the run-up to TFD every penny earned by a taxpayer in the UK goes towards paying taxes. After TFD, every penny earned is retained. In 2025, TFD was estimated to
fall on 12 June. That means162 working days of paying taxes, six days more than 2024.
UK stock markets also performed well on Budget Day. The larger end of the market was up around 1%, while the more domestically focused mid-caps were up 1.2%. Global markets as a whole though were up on the day, so hard to quantify the impact the Budget had on London’s stock markets but there was no dramatic reaction. And that is a win of sorts.
10. What are the top three pieces of advice going into 2026?
Have a plan because personal finance is getting more complicated: The last two budgets have brought considerable change to the UK’s tax landscape, much of which hasn’t come into force yet. There is still time to take action and put in place an effective plan tailored to your specific circumstances and needs. But time is running out.
Don’t rely on google search or AI and seek professional advice: A quick search on google or through AI often throws up out-of-date information. Expert, up-to-date advice should be sought.
Think bigger picture: When investing always have the bigger picture in mind and take the long-term view. The Budget did leave unanswered questions, specifically how is growth going to pick up, but many UK-listed companies generate the majority of their earnings from overseas markets. And the UK is only one component of a typical diversified, multiasset portfolio, so while budgets and the run-up to them can create considerable noise, their impact on portfolios is limited. A budget’s bark tends to be worse than its bite.