Budget 2025: How Income, Savings and Investment Are Really Changing
The 2025 Budget marks a decisive shift in how the UK government taxes income, savings and wealth. What a mucky field now. While the headlines focus on stability and fairness, the small print reveals a structural re-engineering of the tax system — moving the burden away from earned income alone and much more firmly onto assets, passive income and accumulated wealth.
Budget 2025 is further proof to Edale the UK tax is no longer just a rate game. The UK government is actively reframing the system around behaviour change. Freezing income thresholds, increasing taxes on passive income, ISA reforms, and more signal a policy pivot away from legacy savings models and towards state-directed “productive investment”. We expect this to continue – reinforcing our philosophy to start early, think even further ahead and plan early.
Here, we analyse the fine print and small details that signal a direction. This article breaks down:
- What is actually changing
- Why it matters for savers and investors
- What is hidden in the technical sections
- Where the real costs will fall over the next decade
1. Income Tax: Frozen Thresholds and Silent Tax Rises
The government has confirmed that income tax thresholds will not rise with inflation.
“The government is maintaining the income tax Personal Allowance at £12,570 and higher rate threshold at £50,270 from April 2028 to April 2031. The additional rate threshold remains at £125,140 from April 2028 to April 2031.”
This applies to:
- The Personal Allowance
- Higher-rate threshold
- Additional rate threshold
Why this matters
Although this looks like “no tax increase”, it quietly raises more tax every year through fiscal drag. As wages rise with inflation, more income is dragged into higher tax bands. The Treasury openly acknowledges this:
“In 2029-30, three-quarters of the revenue from maintaining income tax and employee and self-employed NICs thresholds is expected to come from the top half of households.”
This confirms:
- The government is relying on frozen thresholds as a core revenue mechanism
- Tax increases are being delivered via inflation, not legislation increases in rates
2. National Insurance: Stability in Rates, Not in Burden
Headline: no big new cuts. Reality: thresholds frozen, meaning real tax rises over time.
“The government is maintaining the NICs Primary Threshold (PT) and Lower Profits Limit (LPL) at £12,570 from April 2028 until April 2031… and the Upper Earnings Limit (UEL)… at £50,270 from April 2028 to April 2031.”
Employer NI thresholds are also fixed:
“The government is maintaining the per-employee threshold at which employers become liable to pay National Insurance… at £5,000 from April 2028 until April 2031.”
Real impact
This reduces:
- Real take-home pay growth
- The value of salary increases (if you get one)
- The efficiency of salary sacrifice schemes in future
3. Major Shift: Higher Taxes on Savings & Dividend Income
One of the most significant changes is the government explicitly increasing tax on non-earned income.
Dividend tax increases
“From 2026-27, the ordinary rate will be increased by 2 percentage points to 10.75% and the upper rate will be increased by 2 percentage points to 35.75%. The additional rate will remain unchanged at 39.35%.”
Savings income tax increases
“From 2027-28, the savings basic rate will be increased by 2 percentage points to 22%, the savings higher rate will be increased by 2 percentage points to 42% and the savings additional rate will be increased by 2 percentage points to 47%.”
The government openly states why:
“The government is increasing taxes on property, dividend and savings income to narrow the gap between tax paid on work and tax paid on income from assets.”
4. Property Income: Separate, Higher Tax Rates
Instead of aligning with standard income tax bands, property income gets its own system:
“From April 2027, the property basic rate will be 22%, the property higher rate will be 42%, and the property additional rate will be 47%.”
This creates:
- A parallel income tax system for landlords
- Structural disincentives for rental income
- Higher effective tax rates on property investment
5. ISA Changes: Not Just Stability – Structural Reform
One of the most dangerous assumptions underlying this budget is that traditional UK tax wrappers (ISAs, pensions, salary sacrifice) are still sacred. The new £12k cash ISA sub-limit, LISA replacement, salary sacrifice cap and more show that even previously “untouchable” structures can be quietly redesigned.
Budget 2025 doesn’t break ISAs per se but clearly repositions them less as tax-free savings shelters and more as capital allocation vehicles. The disincentives for large cash ISAs for under-65s are all about the government directing your capital into UK and global markets, with less individual control. Edale view is this reinforces the importance of having competitive liquidity & access strategies, especially for those clients where they do not move cash from low interest accounts.
Structural reform of ISAs is one of the most misunderstood and under-scrutinised parts of the Budget.
New cash ISA restriction
“From 6 April 2027 the annual ISA cash limit will be set at £12,000, within the overall annual ISA limit of £20,000.”
However:
“Savers over the age of 65 will continue to be able to save up to £20,000 in a cash ISA each year.”
Lifetime ISA is being phased out
“The government will publish a consultation in early 2026 on the implementation of a new, simpler ISA product… Once available, this new product will be offered in place of the Lifetime ISA.”
What this really means
ISAs are moving away from being:
Passive cash shelters
Toward being:
Structured vehicles for driving capital into investment markets.
The government confirms this intent:
“The government is delivering reforms to Individual Savings Accounts (ISAs) as part of its wider strategy to develop a retail investment culture.”
6. Capital Gains & Investment Reliefs
There are no headline CGT rate increases — but several reliefs are reduced or tightened.
EOT relief cut
“The government will reduce the Capital Gains Tax relief available on qualifying disposals to Employee Ownership Trusts from 100% of the gain to 50%.”
Entrepreneurs and venture schemes
While EIS/VCT investment limits are increased, income tax relief is reduced:
“Venture Capital Trust (VCT)… Reduce the VCT scheme Income Tax relief from 6 April 2026.”
7. Pensions: A Calm Surface, But Big Change Underneath
Limiting salary sacrifice benefits
“The government will charge employer and employee NICs on pension contributions above £2,000 per annum made via salary sacrifice… from 6 April 2029.”
And the logic is made explicit:
“The costs of this relief… disproportionately benefitted higher earners.”
Pension funds pulled into inheritance tax
This is a major future change:
“From 6 April 2027, the government is removing the opportunity for individuals to use pensions as a vehicle for IHT planning by bringing unspent pots into the scope of IHT.”
This could fundamentally alter legacy planning strategies.
8. Inheritance Tax: More Fixing, More Taxation
Alongside pension changes:
“The inheritance tax nil-rate bands are already set at current levels until April 2030 and will stay fixed… until April 2031.”
Combined with new rules:
“Any unused £1 million allowance for the 100% rate of agricultural property relief and business property relief will be transferable between spouses and civil partners.”
9. The Small Print That Most Commentators Will Miss
Here are three under-reported shifts:
A. Reordering how tax reliefs are applied
“Reliefs and allowances… will only be applied to property, savings and dividend income after they have been applied to other sources of income.”
This increases effective tax on passive income for higher earners. The effect of this change is that your tax-free allowances and reliefs are used up first against your salary or other primary income, before they can offset tax on things like rental income, savings interest or dividends. In practical terms it makes property income, bank interest and investment dividends more likely to be fully taxed, because your allowances will already have been used up elsewhere – so you keep less of your passive income than previously
Example: How the new ordering of allowances increases tax on passive income
Scenario:
Sarah earns both from employment and investments.
- Employment income: £45,000
- Property rental income: £12,000
- Dividend income: £5,000
- Personal allowance: £12,570
Old approach (before the change)
Sarah could decide how her personal allowance was allocated. She might choose to apply:
- £10,000 of her allowance to rental income
- £2,570 to employment income
This would reduce her taxable passive income, lowering tax on the rent.
New approach (after this rule)
Now her allowances must be applied first to earned income.
Step 1 – Apply allowance to salary
- Salary: £45,000
- Less personal allowance: £12,570
- Taxable salary = £32,430
Step 2 – Her passive income gets no allowance offset
- Rental income: £12,000 → fully taxable
- Dividend income: £5,000 → fully taxable
She cannot use her unused allowance to reduce tax on rental or dividend income.
Tax impact difference
Under the old flexibility, Sarah reduced taxable property income.
Under the new rule, she loses that option and pays more tax on rental and dividend income.
As a result:
✅ Her earned income is taxed first
❌ Her passive income becomes fully exposed to higher rates
❌ Her total tax liability increases without a rate change
Why this matters
This change quietly:
- Increases effective tax rates on landlords and investors
- Penalises those with multiple income streams
- Reduces strategic tax planning flexibility
- Incentivises income restructuring or wrapper use
It disproportionately affects:
- Property investors
- Business owners taking dividends
- International clients with mixed income flows
B. Non-residents taxed more aggressively
A major change for internationally mobile individuals:
“The government will abolish the dividend tax credit for non-UK residents with UK income.”
The abolition of the dividend tax credit for non-UK residents means that UK dividend income will no longer receive preferential tax treatment simply because the recipient lives abroad. In practice, this is likely to make UK dividends more taxable for non-residents, potentially requiring them to report and pay UK tax on that income, subject to any double-tax treaty relief. For internationally mobile investors, it reduces the historic tax advantage of holding UK dividend-paying shares while resident overseas and increases the need for careful cross-border tax planning.
C. Voluntary National Insurance for expats is restricted
“From 6 April 2026, the government will remove access to pay voluntary Class 2 NICs abroad and increase the initial residency or contributions requirement… to 10 years.”
This will directly impact overseas UK contributors.
Voluntary National Insurance contributions have been for some one of the most cost-effective ways to make a retirement top-up, if you are a UK expat who qualifies to make Class 2 contributions, typically they cost ~£180 per year. Voluntary Class 2 contributions can provide over £300 per year increase in future State Pension for just a single qualifying year in many cases. This is therefore a cost that can be recouped in year 1 of receiving pension benefits. Class 3 voluntary contributions are more expensive at approximately £900+ per year and have more long-term horizon exposure in terms of payback butcan still be cost effective for some. For the internationally mobile, voluntary NI is likely best used in a tactical supplement role rather than as part of a core retirement strategy, as now the political lands ar moving and narrows the UK state pension.
Conclusion: This Is a Structural Shift, Not a Traditional Budget
This Budget is not about just raising money. It is clearly about:
- Shifting tax from work to wealth
- Steering savings away from cash
- Restructuring pensions and inheritance planning
- Making passive income explicitly more expensive
As the document puts it:
“The government is taking action to ensure income from assets is taxed more fairly.”
For savers and investors, this Budget is less about “how much tax” and more about where and how you are allowed to build wealth going forward.