On 26 November 2025, Chancellor Rachel Reeves delivered her second Budget, introducing a series of tax changes that will significantly affect middle-class households across the United Kingdom.
While headline income tax rates remain unchanged, a combination of frozen thresholds, increased taxes on savings and investments and changes to pension contributions means that working families will face their highest tax burden in over 70 years.
Understanding the UK Budget 2025 Context
The UK Budget 2025 marks a major shift in how the government plans to raise revenue. Rather than increasing headline tax rates, Chancellor Reeves has opted for what many economists call “stealth taxes”, it measures that increase your tax bill without changing the rates you see advertised.
By 2030-31, the tax burden is projected to reach 38.3% of GDP, the highest level on record. For middle-class families earning between £30,000 and £100,000, these changes will be particularly painful.
What is Fiscal Drag and Why is it Important?
The most significant change affecting middle-class families is the extension of the freeze on income tax thresholds until April 2031. This policy, known as fiscal drag, occurs when tax thresholds remain fixed while wages and prices rise due to inflation.
Here’s how fiscal drag UK budget works: The UK personal allowance 2025/26 is frozen at £12,570. With inflation running at around 3-4% annually, someone who needs to earn £14,400 today to match 2022’s purchasing power is now paying tax on approximately £1,830 despite not being any better off in real terms.
According to the Office for Budget Responsibility, the freeze on income tax thresholds will:
- Pull 780,000 people into paying income tax for the first time by 2029-30
- Push 924,000 people into the higher tax rate band
- Add 4,000 people to the additional rate tax bracket
- Raise £8.3 billion annually by 2029-30
This process means that middle-income earners will bear the brunt of the tax increases, even though official rates haven’t changed.
UK Budget 2025: Freeze Income Thresholds Impact on Take-Home Pay
The practical impact on your take-home pay is significant and grows year by year. Let’s look at real-world examples:
Example 1: Basic Rate Taxpayer
- Current salary: £35,000
- With threshold frozen: Pay tax on £22,430 at 20% = £4,486
- If thresholds had risen with inflation (to ~£14,400): Pay tax on £20,600 = £4,120
- Annual loss in take-home pay: £366
Example 2: Crossing into Higher Rate
- Current salary: £52,000
- With threshold frozen at £50,270: Pay 40% on £1,730 = £692 extra
- If threshold had risen to ~£57,000: Still in basic rate band
- Annual loss in take-home pay: £692
By 2031, someone earning £60,000 could be paying £2,000-£3,000 more per year compared to a scenario where thresholds had risen with inflation.
UK Income Tax Rates 2025-26: What You Need to Know?
For the 2025/26 tax year, the UK income tax rates 2025-26 remain structured as follows, according to the official government documentation:
| Tax Band | Income Range | Tax Rate |
|---|---|---|
| Personal Allowance | £0 – £12,570 | 0% |
| Basic Rate | £12,571 – £50,270 | 20% |
| Higher Rate | £50,271 – £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
These thresholds apply to England, Wales and Northern Ireland. Scotland has different rates set by the Scottish Government.
Impact on Higher Rate Taxpayers
The UK higher rate tax band 2025 begins at £50,270. With wage growth averaging 4-5% annually, many middle-class workers will find themselves pushed into this band even if their real earnings haven’t increased.
Someone earning £48,000 today could easily find themselves in the 40% tax bracket within two years simply due to inflation-matching pay rises.
This approach has been described as a “hidden tax rise” by financial analysts.
Why UK Middle Class Might Pay More Tax in 2025-2026?
The reality is that middle-class families are paying more tax through a combination of:
- Fiscal drag: More income taxed at higher rates due to frozen thresholds.
- Investment income taxes: Higher rates on dividends, property and savings.
- Reduced reliefs: Caps on beneficial arrangements like pension salary sacrifice.
- New levies: Such as the council tax surcharge and eVED.
- Compounding effects: These changes don’t exist in isolation. A family affected by fiscal drag who also receives dividend income and has savings will face multiple simultaneous tax increases.
These changes reflect the government’s strategy to raise revenue without breaking manifesto pledges on headline rates.
One of the most significant changes in the UK Budget 2025 is the increase in dividend tax rates from April 2026. This affects millions of investors and small business owners who receive dividend income.
New Dividend Tax Rates from April 2026
| Tax Band | Current Rate (2025/26) | New Rate (from April 2026) | Increase |
|---|---|---|---|
| Basic Rate | 8.75% | 10.75% | +2% |
| Higher Rate | 33.75% | 35.75% | +2% |
| Additional Rate | 39.35% | 39.35% | No change |
The UK dividend tax rates 2025 26 currently offer a small dividend allowance of £500, which remains unchanged. However, the 2 percentage point increase in rates will hit both investors and company directors hard.
Financial Impact on Small Business Owners
Many limited company directors pay themselves a small salary (often around £12,570 to use their personal allowance) and take the rest as dividends. Here’s how the changes affect them:
Example 1: Basic Rate Taxpayer
- Total income: £50,270 (£12,570 salary + £37,700 dividends)
- Current tax on dividends: £3,255
- Tax from April 2026: £3,999
- Extra cost: £744 per year
Example 2: Higher Rate Taxpayer
- Total income: £75,000 (£12,570 salary + £62,430 dividends)
- Current tax: £7,406
- Tax from April 2026: £8,398
- Extra cost: £992 per year
These increases represent a significant additional cost for small business owners and investors who rely on dividend income. The changes apply UK-wide as dividend tax is a reserved matter.
UK Property Tax Changes 2025: New Rates for Landlords
Landlords and property investors face even steeper increases. From April 2027, the government is introducing separate tax rates specifically for property income.
New Property Income Tax Rates (from April 2027)
| Current Rate | New Property Rate | Increase |
|---|---|---|
| 20% (Basic) | 22% | +2% |
| 40% (Higher) | 42% | +2% |
| 45% (Additional) | 47% | +2% |
These changes apply to rental income from residential and commercial properties. The government argues this helps balance the tax burden between income from work (which also incurs National Insurance) and income from assets.
Increased Taxation on Savings and Cash ISA Changes
Interest on savings will also face increased taxation. The UK savings and dividend tax rise applies a 2 percentage point increase across all bands from April 2027.
Currently, basic rate taxpayers can earn £1,000 in savings interest tax-free through the Personal Savings Allowance, while higher rate taxpayers get £500. These allowances remain, but any interest above these limits will be taxed at higher rates:
- Basic rate: increases from 20% to 22%
- Higher rate: increases from 40% to 42%
- Additional rate: increases from 45% to 47%
With interest rates on savings accounts finally offering decent returns after years of low rates, many middle-class families who’ve been diligently saving will see their returns diminished.
From April 2027, the annual Cash ISA limit will be reduced from £20,000 to approximately £12,000 for those under 65.
This personal allowance tax raise in the UK in 2025 measure means savers will have less space to shelter their money from tax.
However, the overall ISA allowance of £20,000 remains unchanged, encouraging people to invest in Stocks and Shares ISAs instead.
Salary Sacrifice Pension Modifications
From April 2029, salary sacrifice pension contributions above £2,000 will no longer be exempt from National Insurance. This change will particularly affect middle and higher earners who use salary sacrifice to reduce their tax bills. The government states this reform addresses the rapidly increasing cost of this relief.
Currently, if you sacrifice £5,000 of salary into your pension, you save both income tax and National Insurance on that amount. From 2029, you’ll only get tax relief on £2,000 , the remaining £3,000 will incur both employer and employee National Insurance contributions.
For a higher rate taxpayer making £10,000 in salary sacrifice contributions, this could mean an extra £1,440 in National Insurance costs annually.
High-Value Council Tax Surcharge
From April 2028, properties worth over £2 million will face an annual High-Value Council Tax Surcharge:
- Properties worth £2m – £5m: £2,500 per year
- Properties worth over £5m: £7,500 per year
Fewer than 1% of properties will be affected by this surcharge. The charge will be based on updated valuations and levied on property owners rather than occupiers.
Local authorities will collect this revenue on behalf of central government and will be fully compensated for administration costs.
UK Vehicle Tax Changes 2025: Pay-Per-Mile for Electric Cars
Another change coming in April 2028 is a pay-per-mile charge for electric and hybrid vehicles:
- Electric vehicles: 3p per mile
- Hybrid vehicles: 1.5p per mile
This move aims to replace the revenue lost from fuel duty as more drivers switch to electric vehicles.
The OBR forecasts that fuel duty receipts will decline to approximately half current levels by the 2030s as EV adoption increases.
Who’s Most Affected?
The UK Budget 2025 middle class tax changes disproportionately affect:
- Dual-income professional couples earning £60,000-£100,000 combined
- Small business owners who take income via dividends
- Landlords and property investors with rental portfolios
- Savers and investors who rely on interest and dividend income
- Middle managers and professionals earning near the higher-rate threshold
Meanwhile, the very wealthy can often use sophisticated tax planning to minimise their exposure and lower earners benefit from increased minimum wage and benefits.
UK Budget 2025 Explained for Savers, Landlords and Investors
For those with investment income beyond their salary, the UK Budget 2025 represents a comprehensive tax increase across all asset classes. Here’s a quick summary for each group:
For Savers
- Interest rates on cash rise from 20%/40%/45% to 22%/42%/47% (April 2027)
- Cash ISA annual limit reduces to £12,000 for under-65s (April 2027)
- Personal Savings Allowance unchanged (£1,000 basic rate, £500 higher rate)
- Action: Maximize ISA contributions, consider premium bonds for tax-free returns
For Landlords
- Rental income taxed at 22%/42%/47% depending on your band (April 2027)
- No changes to mortgage interest relief rules (remains restricted)
- Capital gains tax on property sales unchanged at 18%/24%
- Action: Review whether rental properties still make financial sense, consider incorporation
For Investors
- Dividend tax rises to 10.75%/35.75% (April 2026)
- Savings interest taxed higher from April 2027
- CGT allowance remains at £3,000
- Action: Use ISA and pension wrappers, consider tax-efficient investment structures
For Business Owners Taking Dividends
- Higher dividend tax from April 2026
- Salary sacrifice pension relief capped at £2,000 from April 2029
- Consider rebalancing salary vs. dividend strategy
- Action: Seek professional advice on optimal extraction strategy
Strategies to Minimise Tax Impact
While these tax increases are unavoidable for many, there are strategies to minimise their impact:
- Maximise ISA contributions: Investments held in ISAs remain free from both income tax and Capital Gains Tax. The current limit is £20,000 per year.
- Use pension contributions strategically: Despite the new £2,000 cap on salary sacrifice NI relief, pension contributions still receive income tax relief and help reduce your overall tax bill.
- Consider timing of asset sales: If you’re planning to sell investments or property, timing matters. The freeze on income tax thresholds frozen until 2031 in the UK, which means planning ahead is crucial.
- Split income with your spouse: Married couples and civil partners can transfer assets between themselves tax-free, potentially using both personal allowances and lower tax bands.
- Review your investment structure: With increased dividend tax, some business owners may want to review whether dividend income remains the most tax-efficient extraction method.
Key Tax Dates for UK Households from the 2025 Budget
To help you plan, here are the crucial implementation dates:
- April 2026: Dividend tax rates increase
- April 2027: Property and savings income tax rates increase
- April 2028: High Value Council Tax Surcharge begins; eVED introduced
- April 2029: Salary sacrifice pension cap takes effect
- April 2031: Income tax threshold freeze ends (current plan)
Conclusion
The UK Budget 2025 represents a fundamental shift in Britain’s tax landscape. While the government avoided increasing headline income tax rates, the combination of frozen thresholds, higher taxes on savings and investments and reduced allowances means middle-class families will face significantly higher tax bills over the coming years.
Understanding these changes is the first step to protecting your finances. By using available allowances wisely, timing income strategically and seeking professional advice where appropriate, you can minimise the impact of these tax increases on your household budget.
The freeze on income thresholds until 2031 UK, combined with persistent inflation, means this isn’t a temporary situation. Middle-class families need to adapt their financial planning for a higher-tax environment that’s likely to persist for years to come.
Frequently Asked Questions
How will UK Budget 2025 affect middle-class families?
Income tax thresholds stay frozen until 2031, so more families pay higher rates as wages rise. Dividend, savings and property taxes increase from 2026-27. The overall tax burden reaches record levels.
What is the UK personal allowance 2025/26?
The UK personal allowance 2025/26 remains frozen at £12,570. This is the amount you can earn before paying any income tax. For high earners above £100,000, the allowance reduces by £1 for every £2 earned over this threshold, disappearing completely at £125,140.
When do the UK dividend tax rates increase?
The UK dividend tax increase 2025 takes effect from April 2026, raising basic rate dividend tax from 8.75% to 10.75% and higher rate dividend tax from 33.75% to 35.75%.
What is fiscal drag and how does it affect me?
Fiscal drag in the UK budget refers to freezing tax thresholds while wages rise with inflation. This means more of your income gets taxed at higher rates, even though your purchasing power hasn’t increased. It’s a form of “stealth tax” that raises government revenue without increasing headline rates.
Will my taxes go up after UK Autumn Budget 2025?
Yes, most middle-class families will pay more tax. Even if your income stays the same, the freeze on income tax thresholds means you’ll likely pay more as wages rise with inflation. If you receive dividends, property income, or savings interest, you’ll face higher rates from 2026-2027 onwards.
How much will the income tax threshold freeze cost me?
The impact varies based on your income. Someone earning £40,000 could pay an extra £200-300 annually compared to if thresholds had risen with inflation. Those earning near the higher-rate threshold (£50,270) could face increases of £500-800 per year as they’re pushed into the 40% tax band.
Are these tax changes permanent?
The freeze on income thresholds is currently set to last until April 2031. The dividend and property tax rate increases are permanent changes unless a future government reverses them. It’s worth noting that the previous government had planned to end the threshold freeze in 2028, but the current government extended it by three years.
What’s happening to the UK capital gains tax allowance 2025 26?
The UK capital gains tax allowance 2025 26 has been significantly reduced in recent years. For 2025/26, it stands at £3,000 (down from £6,000 in 2023/24 and £12,300 in 2022/23). This means you’ll pay CGT on profits from selling assets above £3,000.
How do these changes compare to other countries?
The UK’s tax burden is rising towards levels seen in many European countries. However, compared to France or Germany, the UK still has relatively lower income tax rates for middle earners. The key difference is the pace of change the UK is experiencing one of the fastest increases in tax burden among developed nations.
