In a budget statement set to reshape the financial landscape for millions, Chancellor Rachel Reeves has unveiled a series of measures that will increase tax bills for savers, investors, and landlords. The Treasury's stated aim is to incentivise investment in British companies and create a fairer system, but critics have labelled the moves a significant 'tax raid'.
Cash Isa Limits Slashed to Drive Investment
A central pillar of the chancellor's strategy is a major shake-up of Individual Savings Accounts (Isas). While the overall annual Isa allowance remains at £20,000, the specific limit for cash Isas will be dramatically reduced. From 6 April 2027, the maximum annual contribution to a cash Isa will be cut by 40%, capped at £12,000.
The Treasury explicitly hopes this change will push savers away from cash and towards stock market investments, particularly in UK equities. However, in a surprise move, the government has introduced an exemption for those aged 65 and over, who will retain the current, higher cash Isa limit.
Pension Salary Sacrifice Schemes Face New Cap
Another widely anticipated change targets salary sacrifice pension schemes, used by over 7 million employees to boost their retirement pots and reduce National Insurance contributions. The Treasury argues that the greatest benefits from these schemes currently go to higher earners.
To 'increase fairness', an annual cap of £2,000 will be introduced on the amount of earnings an employee can exchange for pension contributions while retaining the National Insurance exemption. This change, however, will not take effect until April 2029.
The government claims that three-quarters of basic-rate taxpayers using these schemes will be unaffected. However, industry experts warn of a broader impact. Steve Hitchiner of the Society of Pension Professionals stated the move would 'affect the take-home pay of millions of employees – especially basic-rate taxpayers'.
According to analysis by Finder, an individual earning £50,000 a year contributing 15% of their salary via sacrifice would see their annual take-home pay reduced by £320 as a result of the cap. The Office for Budget Responsibility estimates the change will raise an additional £4.7 billion in the 2029-30 financial year.
Significant Tax Hikes on Savings and Investment Income
In what has been described as the budget's biggest surprise, the chancellor announced direct increases to income tax on savings and assets. The goal, according to the Treasury, is to 'narrow the gap between tax paid on work and tax paid on income from assets'.
Starting April 2027, income tax rates on savings interest and property income will rise by 2 percentage points. After the change:
- Basic-rate taxpayers will pay 22%
- Higher-rate taxpayers will pay 42%
- Additional rate taxpayers will pay 47%
Sarah Coles, head of personal finance at Hargreaves Lansdown, called this 'a really shocking tax rise for savers,' noting that while the Personal Savings Allowance will still protect some interest, many will face a higher bill.
An earlier tax increase will hit owners of income-producing shares. From April 2026, dividend taxes will also rise:
- The ordinary rate increases from 8.75% to 10.75%
- The upper rate increases from 33.75% to 35.75%
Coles remarked that this 'tax attack on dividends flies in the face of the government’s desire to encourage investors to hold UK equities.'
For landlords, the higher taxes on property income could have severe consequences. Zena Hanks, a partner at Saffery accountancy, warned it would 'tighten already thin margins,' potentially forcing landlords to increase rents or exit the market altogether.
The Treasury has defended these measures by stating that in each case, over 90% of taxpayers will not have income subject to the new charges. Nevertheless, the combined effect of these changes marks a significant shift in the UK's approach to taxing savings and investment, with millions set to feel the impact from 2026 onwards.
