By Neil Armstrong, Tax Director
In the weeks preceding today’s Budget, it had become clear that Rachel Reeves was wrestling with a difficult equation. On one hand, she faced the unavoidable need to raise revenue for an Exchequer still under significant strain. On the other, she remained boxed in by her commitment not to increase taxes on working people and by a business community still bruised from last year’s rises in Employer National Insurance and tighter thresholds. Reeves needed money, but she could not afford a backlash.
Having briefly floated the possibility of increasing income tax, she quickly discovered just how little room she had to manoeuvre. The reaction was swift and negative, and for a Chancellor who had repeatedly pledged not to raise taxes on people, it closed off one of the most direct revenue-raising routes. From that point, Reeves had little choice but to reach for more indirect mechanisms – those that raise income without appearing to break promises.
It is therefore unsurprising that the centrepiece of the Budget targeted measures affecting only a minority. The so-called “mansion tax”, introducing higher council tax bands for homes valued above £2 million, will be felt in parts of London and the South East but barely registers in Northern Ireland. Politically, it is a neat move: lucrative for the Treasury and unlikely to trouble most voters.
Changes to income from assets are expected to raise £2.2 billion by 2029–30 and may be where more people eventually feel the pinch. From April 2027, property income will face new rates of 22%, 42% and 47%, a shift that could add between £20 and £25 per month to typical rents. Dividend income will rise by two percentage points for the ordinary and upper rates from April 2026, while savings income increases by the same amount across all bands from April 2027.
Reeves also extended the freeze on income tax and National Insurance thresholds for another three years. Fiscal drag, where inflation and pay rises move people into higher bands, means the Government will still collect more. Reeves can argue she honoured her promise; however, it is well established that extending the freeze is, in effect, a tax rise.
The new £2,000 cap on pension salary sacrifice also attracted attention, with HMRC estimating that 7.7 million employees used the scheme in 2024. However, as the cap does not take effect until 2029, it seems unlikely that the £4.7 billion it is forecast to raise will fully materialise.
When the dust settles, the reality remains that every taxpayer will end up contributing more, whether or not it is immediately obvious. Reeves may hope this careful balancing act will spare her the political fallout of more direct tax rises, but despite the targeted nature of many announcements, this was still a revenue-raising Budget, one that quietly ensures we will all feel its impact in the months ahead.
To discuss any aspect, please get in touch with Neil Armstrong, Tax Director T: 028 9032 3466 E: neilarmstrong@bakertillymm.co.uk