The government has announced a series of significant financial changes impacting households and businesses across the UK. These measures, detailed in the latest Budget, will affect income tax, savings, vehicle ownership, and social welfare programs, with many changes set to take effect in the coming years.
Key among the announcements are frozen income tax thresholds, new taxes for electric vehicles, and adjustments to social benefits. These changes aim to reshape economic behavior and government revenue.
Key Takeaways
- Income tax thresholds will remain frozen until 2031, potentially pushing more people into higher tax brackets.
- Electric vehicle (EV) drivers will face new road taxes from 2028, including a per-mile charge.
- The annual tax-free cash ISA allowance for under 65s will decrease from £20,000 to £12,000.
- Minimum wage rates will increase in April, boosting earnings for eligible workers.
- The two-child benefit cap will be scrapped from April next year, providing more support to larger families.
Income Tax Thresholds Frozen Until 2031
One of the most impactful decisions is the continued freeze on income tax thresholds. These thresholds, which determine the rates at which individuals pay income tax, will not increase with inflation. Instead, they will remain fixed until 2031, extending the freeze by three years beyond previous plans.
This policy means that as wages rise, more individuals may find themselves moving into higher tax brackets. This phenomenon, often called 'fiscal drag,' results in a greater proportion of income being taxed.
Income Tax Impact
The freeze on income tax bands until 2031 means that a pay rise could lead to a higher effective tax rate for many workers.
Scotland operates its own distinct income tax rates, so the direct impact may vary for residents there. For those who do not earn enough to pay income tax, value-added tax (VAT) on goods and services remains unchanged, potentially affecting them more significantly.
New Road Taxes for Electric Vehicles
Drivers of electric vehicles (EVs) and hybrid cars will face new road taxes starting in 2028. This marks a shift in how these vehicles are taxed, moving away from previous exemptions.
EV drivers will be subject to a per-mile charge, in addition to other existing road taxes. This new 'road pricing' system aims to account for the wear and tear on roads, as EV drivers currently do not contribute through fuel duty.
Fuel Duty Freeze
While EV drivers face new charges, fuel duty for petrol and diesel vehicles will remain frozen for five months from April, followed by a staged increase from September 2026.
Calculating the exact number of miles drivers cover for this new tax presents a challenge. The government will need to implement a robust system to track vehicle usage accurately.
Minimum Wage Increases Confirmed
Good news for many workers comes with confirmed increases in minimum wage rates, effective from April. These adjustments aim to boost earnings for eligible employees across different age groups.
- The National Living Wage for workers aged 21 and over will rise to £12.71 per hour, up from £12.21.
- For those aged 18, 19, or 20, the National Minimum Wage will increase to £10.85 per hour, up from £10.
- Workers aged 16 or 17 will see their minimum wage go up to £8 per hour, from £7.55.
- The apprentice rate, applicable to eligible individuals under 19 or those over 19 in their first year of an apprenticeship, will also increase to £8 per hour, from £7.55.
These increases are expected to provide a significant uplift in income for millions of low-wage earners across the country.
Changes to Savings and Pensions
The Budget introduces notable changes to personal savings and pension schemes. The tax-free allowance for cash Individual Savings Accounts (ISAs) will be reduced for many savers.
For individuals under 65, the amount that can be saved tax-free in a cash ISA each year will decrease from £20,000 to £12,000. This move is intended to encourage greater investment in stocks and shares ISAs, which carry more risk but could support economic growth.
Cash ISA Statistics
Approximately a quarter of current cash ISA savers deposit more than £12,000 annually. Many of these are pensioners, who will retain their £20,000 tax-free allowance.
Separately, the Help to Save scheme, designed to assist low-income individuals receiving Universal Credit in saving money, will be extended from 2028. This provides continued support for vulnerable households to build financial resilience.
For those with higher savings, tax rates on savings income will increase from April 2027. The basic, higher, and additional rates will rise by two percentage points to 22%, 42%, and 47% respectively. This change makes the savings tax system more complex, though most people do not save enough to pay income tax on their savings.
Pension Scheme Adjustments
A new cap will be introduced on the amount that can be contributed to pensions through salary sacrifice schemes. From April 2029, a £2,000-a-year cap will apply to tax-efficient pension contributions made via this method.
While employees will still receive income tax relief on their pension contributions, some argue this cap could reduce incentives for pension saving. Salary sacrifice schemes allow both employers and employees to make National Insurance savings.
Housing and Council Tax Revisions
Homeowners in England with properties valued at £2 million or more will face a new council tax surcharge from April 2028. This measure, sometimes referred to as a 'mansion tax,' will primarily affect about 100,000 properties, mainly in London and the South East of England.
The surcharge will be structured across four price bands, ranging from an additional £2,500 for properties valued between £2 million and £2.5 million, up to £7,500 for homes valued at £5 million or more.
This policy will require the revaluation of homes in the highest council tax bands (F, G, and H), the first such revaluation since 1991.
Benefits and State Pension Increases
Most benefits and the State Pension will see increases in April, in line with rising prices and average wages. This aims to support individuals and families amid cost of living pressures.
- Main disability benefits, including Personal Independence Payment, Attendance Allowance, and Disability Living Allowance, along with Carer's Allowance, will increase by 3.8% in April.
- The State Pension will rise by 4.8% in April, mirroring average wage growth. This means:
- The new flat-rate State Pension (for those who reached state pension age after April 2016) will increase to £241.30 per week, or £12,547.60 per year, an increase of £574.60.
- The old basic State Pension (for those who reached state pension age before April 2016) will go up to £184.90 per week, or £9,614.80 per year, an increase of £439.40.
These increases bring the State Pension closer to the income tax threshold, a topic of ongoing debate regarding the 'triple lock' mechanism.
Support for Larger Families
A significant change for families is the abolition of the two-child cap on Universal Credit and tax credits. This cap, which currently limits benefits to the first two children, will be scrapped in April next year.
This policy reversal means that many thousands of parents with three or more children will receive increased Universal Credit and tax credits, providing greater financial support for larger households.
"The decision to scrap the two-child benefit cap will provide crucial relief for many families struggling with rising costs, ensuring more equitable support for all children."
Other Key Announcements
Several other measures were confirmed in the Budget, impacting various aspects of daily life:
- Energy Bills: Some levies on energy bills will be removed, projected to lower bills for millions of households by £150 a year. This cut involves a scheme previously designed to tackle fuel poverty and reduce carbon emissions.
- Train Fares: Regulated rail fares in England will be frozen until March 2027. This marks the first time in 30 years that these fares, which include most commuter season tickets and some off-peak long-distance tickets, have been held unchanged. This freeze applies only to services run by England-based train operating companies.
- Bus Fares: The £3 cap for a single bus journey in England will remain in place until March 2027.
- Fizzy Drinks Tax: The UK's tax on fizzy drinks will expand in 2028 to include milk-based products with high sugar content, such as pre-packaged milkshakes and coffees. This could lead to price increases or changes in product formulations.
- Prescription Charges: The cost of a single NHS prescription in England will be frozen at £9.90 for the second consecutive year in April.
- Motability Scheme: Disabled individuals using the Motability scheme will no longer be able to choose 'premium' vehicles from brands like BMW, Mercedes, Audi, Alfa Romeo, and Lexus.
- Tourist Tax Powers: England's mayors could gain powers to implement a levy on overnight stays, often called a 'tourist tax.' Mayors would decide the charge level and how to allocate the funds within their areas, subject to consultation.
These wide-ranging changes reflect a comprehensive approach to managing the nation's finances, addressing both revenue generation and support for citizens.
