The Labour government previously promised not to increase taxes on working people, meaning it wouldn’t raise Income Tax or National Insurance (NI). However, in the wake of the recent Budget, the chancellor has been accused of breaking this commitment.
While Rachel Reeves didn’t officially raise the rate of Income Tax, she did make some important changes that might affect the amount you pay in the future.
Read on to learn about the Income Tax changes announced in the Budget.
Income Tax thresholds will remain frozen at their current levels until 2030/31
Much of the debate about whether the government broke its promise centres around frozen tax thresholds.
The chancellor stated that, as she didn’t change the rates applied to earnings, she hasn’t increased Income Tax. Meanwhile, critics argue that her decision to freeze Income Tax thresholds amounts to a tax rise because of a phenomenon called “fiscal drag”.
As of 2025/26, you can earn up to £12,570 a year before paying Income Tax. This is your Personal Allowance.
You will then pay:
- The basic rate of 20% on earnings between £12,571 and £50,270
- The higher rate of 40% on earnings between £50,271 and £125,140
- The additional rate of 45% on earnings that exceed £125,140.
These thresholds have been set at their current levels since 2022, and Rachel Reeves extended the freeze in her Budget until at least 2030/31.
Meanwhile, average wages have increased in that time and will likely continue to do so. As the Income Tax thresholds remain frozen, a higher proportion of your earnings could be pushed into the taxable range and you may be more likely to move into a higher tax bracket.
As a result, you effectively pay more Income Tax, even though the headline rate hasn’t increased. This is fiscal drag in action.
Prior to the Budget, the Institute of Fiscal Studies (IFS) published figures estimating that extending the freeze would raise an additional £8.3 billion a year by 2029/30.
The chancellor plans to increase the rate of tax you pay on dividends, property income, and savings interest
The rate of Income Tax on earnings from employment and pension income didn’t change in the Budget. However, the chancellor did increase certain types of Income Tax.
Tax on property income and savings interest will increase from April 2027
If you own a property that you rent out, you may pay Income Tax on your earnings.
You may also pay Income Tax on interest you earn from non-ISA cash savings. As of 2025/26, you have a Personal Savings Allowance (PSA) of:
- £1,000 if you’re a basic-rate taxpayer
- £500 if you’re a higher-rate taxpayer
- £0 if you’re an additional-rate taxpayer.
Any interest that exceeds the PSA is taxable.
You currently pay Income Tax at your marginal rate on earnings from property or savings interest.
Reeves announced that tax on income from these sources will increase by 2% for all tax brackets from April 2027 onwards.
The basic and higher rates of Dividend Tax will increase from April 2026
You may earn dividends – a portion of a company’s profits paid to shareholders – from certain stocks and shares. Business owners may also use dividends to draw an income from their company.
As of 2025/26, the first £500 of dividends you earn each year is tax-free. You’ll then pay Dividend Tax (a form of Income Tax) on any dividends above this threshold.
The rate of Dividend Tax in 2025/26 is:
- 8.75% for basic-rate taxpayers
- 33.75% for higher-rate taxpayers
- 39.35% for additional-rate taxpayers.
From April 2026 onwards, the basic and higher rates of Dividend Tax will both increase by 2%, while the additional rate will remain the same.
We can help you adapt to tax changes introduced in the Budget
The changes announced in the Budget could mean you pay more tax on your income in the future. Fortunately, you have time to prepare before new legislation takes effect.
We can discuss ways to mitigate certain taxes. For instance, if you’re paying tax on your cash savings interest or dividends, we can help you make the most of tax wrappers such as ISAs and pensions.
Additionally, we can review your wider financial plan and how tax increases could affect your progress. Often, we’ll find that you are still able to continue to build wealth despite changes announced in the Budget.
Our support offers valuable peace of mind that you can successfully navigate the changing tax landscape and continue working towards your goals.
Get in touch
If you’re worried about upcoming tax changes, we can help.
Please give us a call on 01276 855717 or email info@braywealth.com today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The Financial Conduct Authority does not regulate tax planning.
For specialist tax advice, please refer to an accountant or tax specialist.
An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.
Investments should be considered over the longer term and should fit with your overall attitude to risk and financial circumstances.
Approved by the Openwork Partnership on 05/12/2025
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