Budget 2025: What You Really Asked About (And What I Think It Means)

Last Tuesday evening, Catriona Bryden and I sat down with Lorraine Windsor to unpack Rachel Reeves' second Budget. Within minutes of opening the Q&A, the questions started flooding in - always a good sign that people are engaged rather than just half-watching while cooking dinner.

But here's what struck me: nobody seemed particularly surprised by what was announced. The mood in the chat felt more like weary acceptance than shock. The threshold freezes extension? Expected. Dividend tax rises? Rumoured for weeks. The slow squeeze rather than the dramatic grab? Very much on brand for this government.

What people wanted to know was simpler and more practical: What does this actually mean for me, and what should I be thinking about?

The Questions That Kept Coming Up

Sarah asked about the personal allowance taper. Specifically, she didn't quite understand the maths on that 60% effective tax rate between £100,000 and £125,140. It's a question I get asked repeatedly, and I don't blame people for being confused - it's deliberately opaque.

Here's how it works: for every £2 you earn over £100,000, you lose £1 of your £12,570 personal allowance. So you pay 40% tax on the income you've earned plus you pay 40% tax on income you previously paid no tax on. The result? You keep just 40p of every extra pound earned. It's brutal, and with thresholds now frozen until 2031, more people are going to drift into this trap as their salaries rise with inflation.

James wanted to understand the dividend changes for business owners. The 2% increase in basic and higher rate dividend tax from April 2026 doesn't sound enormous until you realise it fundamentally changes the extraction calculation. For decades, the rule has been simple: take low PAYE, extract the rest as dividends. That's about to get much more complicated, and for the first time ever, dividends won't automatically be the optimal route for everyone.

Several people asked about pension salary sacrifice and when exactly the NI charge kicks in. The answer is April 2029, but here's the critical point: that gives you three and a half years to make the most of the current rules. After that, employer and employee NI will be charged on contributions over £2,000. If you've been thinking about increasing pension contributions, you now have a deadline.

What This Budget Really Is

Someone during the webinar asked if there was any good news. Catriona joked that at least bingo duty was being abolished (she's not wrong - every little helps).

But stepping back, I think the OBR summed this Budget up perfectly: "frontloaded increase in spending of £9 billion and backloaded increase in taxes of £26 billion." Spend now, tax later. It's the political equivalent of buying Christmas presents on a credit card you won't have to pay off until 2027.

The real pain doesn't arrive until then. And that's both the challenge and the opportunity - if you're going to be affected by these changes, you've got time to think about your position. But only if you actually use that time.

The Stealth Tax That Affects Almost Everyone

Let me give you the example we used during the webinar, because I think it's the most important thing to understand about this Budget.

Meet Emma. She earns £60,000 today. Assume she gets normal pay rises roughly in line with inflation over the next five years - nothing spectacular, just keeping pace. By 2030/31, she should be earning around £72,000.

Now, historically, tax thresholds rose with inflation too. If that had continued, Emma would pay around £18,000 in tax. But with frozen thresholds? She'll pay about £20,300. That's an extra £2,400 a year - nearly £10,000 over the freeze period.

Here's the kicker: Emma hasn't had a real pay rise at all. Her £72,000 in 2030 buys the same as her £60,000 does today. But she's paying significantly more tax. That's fiscal drag, and it's the government's favourite stealth tax because most people don't notice it happening until it's already happened.

And Emma's not even in the worst position. If you're earning around £100,000 now, you're heading straight toward that 60% effective tax rate zone as the threshold freeze continues and your salary (hopefully) rises. More people are going to discover just how painful that trap really is.

If You Run Your Own Business

The questions from business owners had a different flavour - less about understanding the mechanics, more about what to actually do about it.

Here's the reality: the traditional calculation for extracting money from your company is changing. The old "low PAYE, rest in dividends" approach worked when the tax difference was significant. From April 2026, that gap narrows considerably.

If you're currently taking £40,000 in dividends, the 2% rate increase costs you £800 a year. Not catastrophic, but not nothing either. Scale that up to £100,000+ extraction and suddenly the numbers get interesting - interesting enough that you really need to model your specific situation rather than just continuing what you've always done.

And here's something else worth understanding: pension contributions become even more valuable for business owners, but there's a ticking clock. From April 2029, those contributions via salary sacrifice start attracting NI charges over £2,000. If you've been considering pension contributions as an extraction route (which offers zero tax and zero NI currently), you've got three and a half years to maximise that advantage.

I'm not saying "do this" or "do that" - your circumstances will be unique. But if you're a business owner and you haven't reviewed your extraction strategy in the last two years, this Budget is your prompt to at least ask the question.

If You're Earning £100k-£125k

You're in the worst tax position in the UK system. I know that sounds dramatic, but the numbers don't lie - you're losing £1 of personal allowance for every £2 you earn above £100,000, creating that effective 60% tax rate.

The only real way to address this is pension contributions, which reduce your adjusted net income and can pull you back below the £100,000 threshold. But working out exactly how much to contribute, and when, isn't straightforward - particularly if you're employed and your pension contributions are made via payroll.

What I can tell you is this: if you're approaching £100,000 or you're already above it, this is worth understanding properly. You could be giving HMRC 60p of every pound when you don't need to.

If You Own a Business or Farm with IHT Exposure

The changes to agricultural and business property relief were among the most significant announcements in this Budget, though they didn't get as much airtime as some other measures.

Previously, these assets could pass completely free of inheritance tax. From April 2026, there's a £1million combined allowance for 100% relief, with 20% IHT applying to value above that threshold. That's still better than the full 40% rate, but it's a substantial change if you're sitting on valuable business assets or farmland.

There is one piece of genuinely good news: unused relief allowances are now transferable between spouses and civil partners. This creates some interesting planning considerations around whether assets should pass directly to your spouse on first death or potentially into trust structures.

I'm not going to spell out what you should do - this is genuinely complex stuff that needs proper advice and depends entirely on your family circumstances, your assets, and your succession plans. But if you're in this position, it's worth having the conversation sooner rather than later.

The Frog in the Pan

There's an old saying (probably not scientifically accurate, but it makes the point): if you drop a frog in boiling water, it jumps out. But if you put a frog in cool water and heat it gradually, it doesn't notice until it's too late.

This Budget is the slow heat approach. No dramatic income tax rate rises (which would have broken a manifesto commitment and been politically toxic). No doubling of capital gains tax. No wealth tax. Just... gradual increases. Frozen thresholds. Two percentage points here, three percentage points there. Changes that take effect in 2027, 2028, 2029.

The government is banking on the fact that most people won't notice the water getting hotter until they're already feeling the heat.

What's Actually Worth Thinking About

I can't tell you what to do - that would require understanding your complete circumstances, your goals, your risk tolerance, and about fifty other factors. But I can tell you what questions are worth asking, particularly based on what came up during the webinar:

Do you understand your current tax position? And I mean really understand it - not just "I pay higher rate tax" but where exactly your income sits, which bands you're in, and where you might drift to over the next few years if thresholds stay frozen and your income rises.

If you're a business owner, when did you last model your extraction strategy? The landscape has shifted. What was optimal in 2023 might not be optimal in 2026. At minimum, it's worth running the numbers.

Are you making use of available pension allowances? The annual allowance is £60,000 for most people. If you're employed and contributing through salary sacrifice, you've got a three-year window before NI charges kick in on contributions over £2,000. If you're not employed, pension contributions remain one of the most tax-efficient things you can do.

If you have children, do you know about the universal credit changes? The two-child cap is being scrapped from April 2026, and the income thresholds for UC stretch further than most people realise. Don't assume you're not eligible just because you earn a decent salary.

If you own property worth over £2million, have you factored in the new surcharge? From April 2028, you'll be paying £2,500-£7,500 annually depending on value. That affects running costs and potentially impacts decisions around downsizing or gifting property.

The Opportunities (Yes, There Are Some)

It's easy to focus exclusively on the negative, but there are elements of this Budget that could have been worse:

Corporation tax rates stayed flat. The ISA allowance remains at £20,000 for now (with a caveat about cash ISAs being restricted to £12,000 for under-65s from 2027/28). Capital gains tax rates are unchanged for 2026/27. VCT relief, while reduced from 30% to 20%, still exists for those with risk capacity and are not suitable for all investors.

And perhaps most importantly: we have clarity. We know what's coming and roughly when. That's not always the case with Budget changes, and it creates planning opportunities for those who use them.

What Happens Next

If you made it through the webinar (or you're reading this now), you're already ahead of most people. You're engaged, you're thinking about this stuff, and you understand that these changes might affect your planning.

The question is what you do with that understanding.

Some of these changes have long lead times - salary sacrifice changes in 2029, property taxes in 2028, savings rate increases in 2027. That creates breathing room. But it's breathing room that disappears quickly if you don't actually use it.

If you'd like to talk through how any of this might affect your specific circumstances, we're here. That's literally what we do all day. And if you missed the webinar but want to watch it back, drop us an email and we'll send you the link.

One last thing: someone during the Q&A asked whether we thought more tax changes were coming. Honestly? Almost certainly. This government has frozen thresholds until 2031, but it's also committed to significant spending increases. The maths doesn't quite work without either economic growth exceeding expectations or... more tax rises.

So yes, I'd expect more changes. Which makes getting your planning right now even more important.

Tax treatment varies according to individual circumstances and is subject to change.

Inheritance Tax & Tax planning is not regulated by the Financial Conduct authority.

 

Approver Quilter Financial Services Limited Dec 25