Chancellor Rachel Reeves's first budget has unveiled significant changes to the UK's tax and benefits system that will affect households across England, Wales and Northern Ireland in the coming years. While the headline rates of income tax, national insurance and VAT remain unchanged, frozen thresholds and new measures will impact millions of Britons differently depending on their circumstances.
Workers and Families Face Mixed Fortunes
For low-income workers like Luke, who earns the national living wage of £12.21 per hour working 35 hours weekly in a cafe, the picture is complex. Currently paying £1,930 in income tax and £772 in national insurance, his monthly take-home pay stands at £1,627. When the NLW increases to £12.71 in April 2026, his annual income tax will rise to £2,112 and NI to £845, giving him £1,681 monthly - a £54 increase.
Average earners face the stealth tax of frozen thresholds. Amir, on the median UK wage of £38,000 in marketing, pays £5,086 income tax and £2,034 NI annually, leaving £2,466 monthly. With tax bands frozen until 2031, any pay rise will push more of his income into higher tax brackets than would normally occur.
Families face particular challenges. The Smith family, with three children and one parent working NLW hours in a distribution centre, currently receive £1,457 monthly in universal credit and child benefit top-ups to their £1,627 take-home pay. The abolition of the two-child cap means they'll gain £304 monthly for their third child from 2026.
Pension Reforms and Business Impacts
Significant changes are coming to pension arrangements. From April 2029, a £2,000 cap on salary sacrifice pension contributions will affect higher earners like Jane, who currently pays £20,000 annually into her pension. At current NI rates, this will cost her an extra £360 yearly if she maintains her contribution level.
Business owners face increased dividend taxation. Jim, who runs a building company taking £85,000 in dividends alongside a £12,570 salary, will see his annual tax bill increase by £1,690 from 2026 due to higher dividend tax rates, reducing his household's monthly income from £8,135 to £7,994.
Pensioners and Future Planning
Pensioners receive mixed news. George, on the basic state pension of £11,550 annually, will benefit from the triple lock increase of 4.8% next year. However, the frozen income tax personal allowance threatens to drag more pensioners into the tax net.
Affluent pensioners Brian and Joan, with £60,000 combined income from state and private pensions, will gain £1,150 annually from the state pension increase but face an additional £230 income tax bill. As owners of a £2 million London home, they'll also pay the new high-value council tax surcharge of £2,500 from 2028.
Young savers and drivers also face changes. Couples saving for first homes will see cash ISA allowances cut from £20,000 to £12,000 for under-65s from April 2027, while electric vehicle drivers will pay a new 3p per mile road charge from 2028, adding approximately £255 to annual costs.
The budget measures represent a significant reshaping of Britain's fiscal landscape, with particular emphasis on redistributive policies and long-term fiscal sustainability, though many households will feel the pinch from threshold freezes and new charges in the years ahead.
