From a shock energy bill cut to a painful stealth tax raid, we look at the key areas affecting your finances.
Chancellor Rachel Reeves has heaped more pain on households by announcing a massive £26 billion worth of tax hikes.
In a truly remarkable Budget, which saw many details accidentally leaked beforehand by the Office for Budget Responsibility (OBR), Reeves announced a huge three-year extension to the personal tax allowance freeze.
The move will see millions paying hundreds of pounds more in tax and rake in billions of extra pounds for the Government.
‘Smorgasbord of misery’
With tax levels as a percentage of national income already at their highest levels since the 1940s and the cost-of-living crisis still biting, many households will have been hoping for some desperate relief in the Budget.
Instead, they’ve been hit with a raft of additional hikes as the chancellor seeks to offset rising Government borrowing and spending commitments.
Kemi Badenoch, leader of the Conservatives, described it as a “smorgasbord of misery”.
There were, however, some positive announcements to emerge from the Budget, most notably a mooted £150 cut to energy bills.
So let’s take a closer look at the key changes announced in the Budget and explain how they’ll affect your finances.
Tax hike by the back door: Personal Allowance freeze extended
The biggest tax raid announced by the Government is the extension of the freeze on Income Tax thresholds by a further three years to 2031.
In the build-up to the Budget, rumours were swirling that this would be a two-year extension, so this was a more painful blow for households than expected.
The move will cost the average worker hundreds of pounds and see as many as 10 million retirees slapped with an Income Tax bill by the end of the decade.
While the impact of freezing allowances will be massive, it isn’t as easy for people to spot as a more direct tax increase, which is why it’s often referred to as a ‘stealth tax’.
Here’s how it works: back in 2022, the Government stopped increasing the levels at which the various rates of Income Tax apply.
Normally, these will increase regularly to reflect rising wages and inflation over the years, ensuring the proportion of our wages that we pay through Income Tax remains broadly the same.
By freezing these thresholds, the Government ensures earners are paying far more tax each year.
The impact has already been keenly felt: loveMONEY’s analysis shows a worker on the average UK salary has seen their annual Income Tax bill soar 41%, or more than £1,500, in just four years.
The decision to extend the freeze from 2028 to 2031 will be a colossal money-spinner for the Government that will dwarf all other measures in the Budget.
As mentioned earlier, all predictions before the Budget were for a two-year extension, so at this stage we only have figures based on that timeframe.
Based on that assumption, analysts had estimated it would see taxpayers handing over an extra £9-£12 billion.
The figure for a three-year freeze will obviously be comfortably higher.
Energy bills to fall by £150?
As mentioned earlier, one bit of good news in the Budget was the promise to lower energy bills.
The chancellor pledged to reduce costs by £150 on average from April by scrapping the Energy Company Obligation, which requires energy firms to help fund insulation and heating systems, and moving some costs to general taxation.
Using her speech, Reeves announced: “I can tell you that, for every family, we are keeping our promise to get energy bills down and cut the cost of living, with £150 cut from the average household energy bill from April.”
Mansion tax for high-value homes
There was a huge blow for owners of especially high-value homes, with the chancellor slapping them with an annual charge of up to £7,500 a year.
From 2028, the Government will introduce a High Value Council Tax, dubbed a ‘mansion tax’, which will raise £400 million a year.
For homes worth more than £2 million, there will be a recurring £2,500 charge, rising to £7,500 a year for homes worth £5 million or more.
This will be payable on top of the standard Council Tax.
The chancellor also confirmed these rates will rise in line with CPI inflation each year, so those figures are very much just the starting point.
Shock savings tax hike (as well as property and dividends)
Like the shock energy bill announcement, this would have been one of the few big surprises in her speech had the OBR not accidentally leaked details of it this morning, as the chancellor announced a tax hike on various types of income, including savings.
From 2027, Reeves announced an additional 2% tax on savings interest, property income and dividends.
That means a Basic Rate taxpayer will incur a 22% charge, while Higher Rate earners will pay 42% and Additional Rate earners 47%.
The move will undoubtedly make Cash ISAs a more attractive haven for savers looking to avoid tax on their interest earned, but these were also caught in the chancellor’s crosshairs.
Cash ISA allowance cut to £12,000 for most
In a bid to push Brits into putting more of their money into the stock market, the chancellor has taken the axe to the annual tax-free savings allowance.
While the overall tax-free annual allowance will remain at £20,000, only £12,000 of this will be eligible for Cash ISA deposits from next year onwards.
The remaining £8,000 will only be available to those using a Stocks and Shares ISA.
Crucially, the change won’t apply to those who are retired (and thus far less likely to want to risk their money on the stock market), with over-65s allowed to keep the full £20,000 a year in a Cash ISA.
Most savers won’t notice the difference
Overall, the Cash ISA reduction is unlikely to directly impact the majority of savers: HMRC data shows two-thirds of Cash ISA holders contribute less than £5,000 a year and only one in 10 make full use of the current £20,000 allowance.
However, there are concerns that the reduction could lead to a spike in mortgage rates.
That’s because many banks use Cash ISA deposits to fund their household lending, and Nationwide Building Society has already warned that reduced ISA savings would impact the availability of first-time buyer mortgages.
Tax misery for motorists
There was bad news for owners of electric vehicles (EVs) and normally aspirated motors alike.
The chancellor announced that an Electric Vehicle Excise Duty will be introduced in 2028, charging 3p per mile for electric cars and 1.5p per mile for hybrid vehicles.
Britannia Car Leasing estimates the average annual mileage at around 7,400.
That means a typical EV motorist will face a £222 annual bill, while hybrid drivers will pay £111.
As for petrol and diesel owners, their pain will be delayed until September.
There has been a 5p discount on this tax in place since 2022 to account for the fact that fuel prices were soaring.
However, the chancellor confirmed this will be scrapped from next Autumn.
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Blow for pension savers: salary sacrifice clampdown
The chancellor also made the controversial decision to clamp down on salary sacrifice schemes.
In a nutshell, these allow employers to slightly lower their NI tax bill while also offering tax incentives to workers to save more for their retirement.
While it is mutually beneficial to both parties, the Government has also identified it as an area for additional tax revenue.
As a result, the chancellor announced a £2,000 cap on the combined employer and employee pension savings available, which will be introduced in 2029.
Any additional contributions will be taxed in the same way as other employee pension contributions, Reeves said.
It’s a controversial change as numerous organisations have warned it will put more people off saving for retirement.
At present, official figures suggest that as many as 14.6 million workers are on track to suffer a sharp drop in living standards because they aren’t setting money aside.
Worryingly, a Freedom of Information request by Steve Webb, the former pension minister and partner at advisors LCP, revealed last week that the real figure is likely far higher.
That’s because the official figures assume the State Pension ‘triple lock’ will remain in place for the next 50 years, which, as Webb notes, is a highly unlikely scenario.
That means many more millions will face a difficult retirement based on how the triple lock, which currently guarantees pension pay will rise by inflation, average earnings or 2.5%, is eventually downgraded.
“Rather than 14.6 million of people of working age facing a sharp drop in their standard of living on retirement, dropping the triple lock would lead to 19 million facing such a drop if the pension was linked to earnings and 26.1 million if it was linked to inflation,” he said.
Two child benefit cap scrapped
At present, Child Benefit is only paid to the first two children that parents have.
As was widely expected, the Chancellor will remove the cap completely from April, in a move that’s expected to cost taxpayers an extra £3 billion a year.
It will be a huge boon for those with especially large families: official figures suggest it will be worth more than £14,000 a year to each of the 18,000 low-income families who have at least six children.
Announcing the removal, Reeves claimed that the Government is achieving "the biggest reduction in child poverty" over a Parliament since records began.
Minimum Wage hike
Millions of the lowest-paid workers will see their pay packets increase sharply from April.
In a move that was confirmed before the Budget speech, the minimum wage for workers aged under 21 will rise by 8.5% to £10.85 an hour.
For workers aged 21 and over, there will be a smaller increase of 4.1%, taking the minimum pay to £12.71 an hour.
Sugar tax extended to dairy products
Another move confirmed in the build-up to the Budget was the decision to extend the sugar tax so that it includes various dairy-based beverages from 2028, in what has been dubbed the ‘milkshake tax’.
Currently, drinks like milkshakes and coffees are excluded from the tax despite having high enough sugar content to be liable for the tax.
Confusingly, the tax will only be applied to pre-packaged drinks, meaning those sold over the counter in cafes or coffee shops will be excluded, despite also containing high levels of sugar.