Measures that will mean higher tax bills for millions of savers and investors were unveiled by the chancellor as part of her budget statement.
Alongside two widely trailed measures – cutting the maximum that can be put into a cash Isa each year and clamping down on salary sacrifice pension schemes – were two surprises: an exemption from the new Isa rules for those over 65, and an increase in income tax on savings interest and property and share dividend income.
The chancellor announced a shake-up of tax-efficient individual savings accounts (Isas), which the Treasury claimed would “drive better returns for savers, and incentivise investment”.
Reeves has kept the overall maximum that people can put in Isas at £20,000 a year, but, as expected, she slashed the annual cash Isa limit by 40%. From 6 April 2027, the maximum amount people can put into cash Isas will be capped at £12,000, excluding over-65s, who will keep the original limit.
The Treasury is keen to encourage a shift from cash into stock market-based investments – in British companies, in particular. Reeves has talked about wanting to create “more of a culture in the UK of retail investing like you have in the US”, and the move to restrict the amount most people can put into cash Isas forms part of that.
Another widely trailed move was a clampdown on the benefits that workers and employers can enjoy by using salary sacrifice pension schemes.
Originally a relatively niche part of the retirement savings system, they have mushroomed in recent years and are said to be used by more than 7 million employees to boost pension contributions and reduce how much they and their employer pay in national insurance.
Pension salary sacrifice is a type of additional retirement provision that some, but not all, companies offer their staff. They involve an employee agreeing to give up some pay and replace it with extra employer contributions into their pension pot – but the Treasury said the greatest benefit was going to higher earners and it was keen to “increase fairness”.
As a result, it is introducing an annual £2,000 cap on the earnings an employee can exchange for pension contributions and benefit from a national insurance exemption. This will not take effect until April 2029. Three-quarters of basic-rate taxpayers, and their employers, using salary sacrifice would be unaffected by this change, the Treasury said.
However, Steve Hitchiner, the chair of the tax group and president at the Society of Pension Professionals (SPP), said the move would “affect the take-home pay of millions of employees – especially basic-rate taxpayers – and is a tax on working people, in spirit if not in name”.
The comparison site Finder said someone on £50,000 a year who was paying 15% of their salary into a pension via salary sacrifice would have their take-home pay reduced by £320 a year as a result of the cap.
The Office for Budget Responsibility (OBR) said the change would raise an additional £4.7bn in 2029-30.
The budget measures included the introduction of higher taxes on savings, property and dividend income in order to “to narrow the gap between tax paid on work and tax paid on income from assets” – a move described by many commenters as a budget “tax raid” on savers, landlords and shareholders.
From April 2027, income tax rates on savings and rented property will be increased by 2 percentage points. After the changes, basic-rate taxpayers will pay 22% on interest or property income, higher-rate taxpayers 42%, and additional rate taxpayers 47%, after any allowances have been used.
Before that, taxes on dividends will be increased, increasing the cost of owning income-producing shares. From April 2026 the ordinary rate will rise from 8.75% to 10.75%, while the upper rate goes from 33.75% to 35.75%.
Sarah Coles, the head of personal finance at the investment platform Hargreaves Lansdown, said: “This is a really shocking tax rise for savers … The personal savings allowance will still protect the first £1,000 of savings interest for basic-rate taxpayers and £500 of interest for higher-rate taxpayers, but after that, people will face a hike in their tax bill.”
She added: “This tax attack on dividends flies in the face of the government’s desire to encourage investors to hold UK equities.”
Zena Hanks, a partner at the accountancy firm Saffery, said the higher taxes on property income would “tighten already thin margins, leaving many landlords feeling they have little option but to pass costs on to renters in order for their rental business to stay viable. For some, it could be the final straw that pushes them out of the market altogether.”
The Treasury said in each case, more than 90% of taxpayers did not have income that would be subject to the new charges.
