UK Autumn Budget 2025: tax hikes, fiscal drag and the mansion tax

UK Chancellor Rachel Reeves delivered her second Budget on 26 November. The measures in the Budget amount to £26 billion in tax rises, setting the UK on a path to reach an all-time high tax burden of 38.3% of GDP by 2030/31, more than five percentage points above the pre-pandemic level of 32.9% in 2019/20.

The most significant developments centred on a continued focus on personal taxation, rather than businesses. While the Chancellor did not raise income tax rates, the freeze in income tax thresholds will bring more basic-rate taxpayers into higher-rate tax bands, known as ‘fiscal drag’. This process is exacerbated by the freezing of national insurance allowances and inheritance tax thresholds.

The key tax announcements for individuals and businesses are summarised below.

Personal Income Tax

Income Tax Thresholds

Freeze on income tax thresholds extended from 2028 to 2031. All income tax and equivalent National Insurance thresholds are to be maintained at their current level until 2031. The previous Conservative government had frozen personal tax thresholds from 2021 to 2028.

As a result, tax bands in England, Wales and Northern Ireland will remain at the following levels until the end of the 2029/30 tax year:

• Personal Allowance 0% – up to £12,570.
• Basic rate 20% – £12,571 to £50,270.
• Higher rate 40% – £50,271 to £125,140.
• Additional rate 45% – over £125,140.

Property, Savings and Dividend Income

Dividend tax rates will increase from 8.75% and 33.75% to 10.75% and 35.75% respectively for basic and higher rate taxpayers with effect from April 2026.  Additional rate dividend tax will remain unchanged at 39.35%

Savings and Property income tax will increase from 20%, 40% and 45% to 22%, 42% and 47% for basic, higher and additional rate taxpayers with effect from April 2027.

‘Mansion’ Tax

High Value Council Tax Surcharge (HVCTS) – from April 2028, owners of properties identified as being valued at over £2 million by the Valuation Office at 2026 prices will pay a recurring annual charge on top of their current council tax. There will be four price bands:

• Property valued at £2 million to £2.5 million – £2,500 per year.
• Property valued at £2.5 million to £3.5 million – £3,500 per year.
• Property valued at £3.5 million to £5 million – £5,000 per year.
• Property valued at £5 million or more – £7,500 per year.

The HVCTS will be administered alongside existing Council Tax by local authorities. The charges will all be uprated by Consumer Prices Index (CPI) inflation each year from 2029-30 onwards.

The government will consult on a full set of reliefs and exemptions, as well as proposed rules for more complex ownership structures including companies, funds, trusts and partnerships.

Excluded Property Trusts

The government will introduce a £5 million cap on the 10-yearly 6% inheritance tax (IHT) charges that can apply to relevant property trusts that were established by non-UK domiciled individuals prior to 30 October 2024, even where that settlor has now acquired long-term-resident (LTR) status in the UK. This change will be relevant for non-UK domiciled individuals with pre-existing trust structures that hold assets more than £83 million.

Temporary Non-Residence (TNR)

From 6 April 2026, all dividends received from close companies by a non-resident shareholder will be charged to tax on return to the UK during a period of temporary non-UK tax residence. Previously, under the TNR rules there was no charge to UK tax if a distribution or dividend was made from ‘post departure trade profits’ – profits that accrued to a company after the individual had left the UK.

Pensions and Salary Sacrifice

From April 2029, the government will restrict the amount of pension contributions that can benefit from National Insurance savings under salary sacrifice arrangements to £2,000 per employee. Contributions above the cap will be taxed in the same way as other contributions. However, there are no changes to the tax relief available on these contributions.

Voluntary National Insurance Contributions

Currently individuals living and working overseas can choose to pay Class 2 Voluntary National Insurance Contributions (VNICs) at the rate of £3.50 per week to ensure their state pension records are fully paid up. It was also only necessary to have lived in the UK for three years prior to be able to access the UK state pension.

From 6 April 2026, access to Class 2 VNICs will be abolished. Non-UK residents will only be able to utilise the Class 3 VNICs rate and, to qualify, will have to have been resident in the UK for ten years prior. The rate of Class 3 VNICs will also increase from £17.75 to £18.40 per week, or £956.80 per annum from 6 April 2026.

Dividend Tax Credit for Non-UK Residents

The government announced that the notional tax credit provided of 8.75% for non-UK residents who receive UK dividends will be abolished with effect for dividends received on and after 6 April 2026.

Individual Savings Allowance (ISA)

The ISA cash limit will be reduced from £20,000 to £12,000 within the overall £20,000 allowance from 6 April 2027. Those over the age of 65 will be able to maintain the full £20,000 cash ISA allowance. However, the overall allowance of £20,000 per year is unchanged, so savers can still spread their money across multiple ISA accounts up this limit.

Inheritance Tax

The inheritance tax (IHT) nil-rate band and residence nil-rate band will remain frozen until April 2031.

Agricultural and Business Property Relief

The £1 million allowance for the 100% rate of agricultural property relief (APR) and business property relief (BPR), which will come into effect on 6 April 2026 for IHT purposes, will be transferable between spouses and civil partners. Previously assets had to be passed to children on first death. The combined allowance for the 100% rate of APR and BPR will be fixed at £1mn until April 2031.

IHT Avoidance

The government has announced it will legislate to prevent IHT avoidance through certain loopholes, including:

• From 6 April 2026, UK agricultural property held via non-UK entities will be ‘looked through’ and treated as UK-situated. Aimed at preventing the conversion of UK agricultural property, which is subject to IHT, into shares in a non-UK company, which is not subject to IHT when owned by individuals who are not long-term residents or by trusts, this brings agricultural property into line with residential property.
• From 26 November 2025, new provisions are introduced to prevent trustees from avoiding the 6% IHT exit charge when non-UK property goes out of scope of IHT by bringing assets to the UK prior to a settlor ceasing to be a long-term resident and then taking the assets offshore again.
• From 26 November 2025, restricting the IHT charity exemptions on gifts made by charitable trusts directly to UK charities unless they meet the wider definition of a charity under existing legislation.

Business Taxation

Employee Ownership Trusts

With immediate effect, the government will reduce capital gains tax (CGT) relief on disposals to employee ownership trusts (EOTs) from 100% to 50%. The Chancellor stated that this change will address the system which has been “creating a route for gains to go completely untaxed when businesses are sold”.

Non-Resident Capital Gains Tax (NRCGT)

The government has clarified that the sale of a UK property rich company (derives more than 75% of its value from UK land), will now specifically cover the cells of overseas protected cell companies.

From 26 November 2025, each cell within a cell company is to be treated like a standalone company for NRCGT purposes so that the cell itself is tested for UK property richness when disposed. These rules apply equally to overseas individuals and companies making disposals of cell companies.

Venture Capital

The venture capital schemes, including the venture capital trust (VCT) and the enterprise investment scheme (EIS), provide incentives for qualifying investors looking to invest in early-stage, higher-risk UK companies.

From April 2026, the investment limits for EIS and VCT companies will be increased to £10 million and for knowledge intensive companies will be increased to £20 million, and the company lifetime limit for receipt of such investments will increase to £24 million and £40 million respectively.

From April 2026, the gross assets threshold will rise to £30 million prior to an investment and £35 million after investment under any of these schemes. However, the rate of VCT income tax relief will fall from 30% to 20%.

Enterprise Management Incentive (EMI)

The size limits for eligible companies will increase from April 2026 as follows:

• Gross assets will increase from £30 million to £120 million.
• The number of employees will increase from 250 employees to 500 employees.

For all eligible companies, the size of the overall option pool will increase from £3 million to £6 million, doubling the number of shares over which EMI options can be granted. Time limits on the exercise period will also increase from 10 years to 15 years. Existing option agreements can be amended to take this change into account.

Diverted Profits Tax

The government will abolish the Diverted Profits Tax (DPT) and replace it with a simplified approach integrated into the corporation tax regime. The new rules will focus on unassessed transfer pricing profits, removing the separate DPT charge and aligning profit attribution with OECD standards. This change aims to streamline compliance, reduce complexity and ensure that UK tax rules remain competitive while effectively countering profit diversion. Transitional guidance will be published to help businesses adapt to the new framework and will apply from 1 January 2026.

UK Listing Relief

A three-year exemption from Stamp Duty Reserve Tax will be introduced for companies listing on the London Stock Exchange (LSE) from 27 November 2025. Investors currently have to pay 0.5% stamp duty when they buy UK-listed shares, but this charge will be waived for three years from the point the company lists on a UK regulated market.

Anti-Tax Avoidance

The government is taking further steps to close the tax gap and said changes will raise £2.4 billion in additional tax revenue in 2029-2030 by collecting more unpaid taxes and modernising the tax system. It aims to improve how HMRC uses information from third parties and build new technology to increase the use of data-driven prompts to help taxpayers avoid errors when submitting tax returns.

Share Exchanges and Company Reorganisations

It is to amend the anti-avoidance rules to counter the no disposal treatment applying to share exchanges and company reorganisations. These amendments will ensure that where a shareholder enters into a share exchange or company reorganisation and one of the main purposes of this is to secure the shareholder a tax advantage, it will now be caught by the anti-avoidance rules.

Informant Rewards

The government is to strengthen the reward scheme for informants who provide information that allows HMRC to tackle high-value avoidance or evasion. For cases where tax over £1.5 million is recovered, HMRC will pay rewards up to 30% of the additional tax collected that would otherwise have gone unpaid.

Small Business Evasion

It will establish a new dedicated small business evasion and enforcement team and deploy 350 HMRC criminal investigators to carry out more targeted criminal interventions tackling the most serious fraud and evasion by small businesses.

Promoters of Tax Avoidance

Following consultation, the government will legislate in finance bill 2025-26 to further target promoters of tax avoidance to allow HMRC to shut schemes down more quickly. Subject to the finance bill, the government will introduce enhanced powers and sanctions to tackle tax advisers who facilitate non-compliance from 1 April 2026.

The Disclosure of Tax Avoidance Schemes (DOTAS) and Disclosure of Tax Avoidance Schemes for VAT and Other Indirect Taxes (DASVOIT) civil penalty regimes will be updated so HMRC can issue penalties directly, without tribunal approval, speeding up enforcement.

However, the government said it will not regulate tax advisers and will instead work in partnership with the sector to raise standards in the tax advice market.

Rogue Directors

It is investing £25 million over the next five years to recruit additional Insolvency Service staff to disqualify more rogue directors. It will also amend the Company Directors Disqualification Act 1986 to extend the circumstances in which directors who break the law can be disqualified.