Autumn Budget 2025: tax hikes, fiscal drag and the return of the mansion tax

The Budget was mired in controversy even before the Chancellor took to her feet, as the OBR had accidentally published its report detailing many of the key measures she was to announce. However, a significant amount of the content had already been trailed in the media through a mix of pre-Budget briefings, leaks, kite-flying and subsequent U-turns.

This is a Budget which will be unwelcome in financial terms for most, if not all, raising the tax take to new heights.

There was the inevitable return of fiscal drag, which has become a reliable source of raising revenue for successive Chancellors in times of need. Accordingly, further freezes to income tax and inheritance tax threshold levels will apply, now extended until April 2031.

Wealth creators and investors will have been disappointed to see increases in rates on dividends and savings, and landlords, in particular, on property income tax rates.

Homeowners will face a new council tax surcharge on homes worth £2 million or more, which many have already dubbed the long discussed "mansion tax" (High Value Council Tax Surcharge doesn’t slip off the tongue in quite the same way).

There was some sleight of hand in this Budget, as many of the revenue-raising measures will not come into effect immediately but over the course of the Parliament or even after the next election (which is due by summer 2029), as explained below. Landlords, in particular, will feel that "sleight of hand" is a generous characterisation of the Chancellor's approach to her manifesto commitments. She has doubled down on her statement that the Government is not increasing the headline rates of income tax, national insurance contributions, or VAT. Landlords paying 47% on rental receipts and investors paying an extra 2% on dividend receipts / savings income may beg to differ.

There was some limited improvement in relation to the anticipated changes to the inheritance tax regime for assets which qualify for business property relief or agricultural property relief. One of the most egregious elements of these proposals was the initial plan that the £1 million cap, applicable for these reliefs from April 2026, would not be transferable between spouses. Fortunately, the government has sensibly abandoned that element and confirmed that unused allowances will be transferable after all.

We look more at the main measures which will impact individuals and families below.

Income tax

As mentioned above, income tax rates will be frozen for an extra three years, which is the largest revenue-raising measure announced (being one of the broadest-based taxes). Extending this to April 2031 contributes £12.7 billion of tax increases out of the total of around £26 billion.

Landlords in England and Wales will face separate rates for property income tax (a 2% hike at each band) from 6 April 2027. Similar hikes will apply at the same time to the rates for savings income, so the new rates for each will then become 22%, 42%, and 47%.

Similar hikes to the dividend rates will take place from 6 April 2026, but only for ordinary (10.75% becoming the new rate) and upper rates (35.75%). The additional rate will remain at 39.35%.

Further, new rules will reorder the way in which income tax reliefs and allowances are applied in relation to property income tax, savings income, and dividend income.

We expect more interest in family investment companies as a result of some of these changes.

Inheritance tax

The inheritance tax (IHT) nil-rate band and residence nil-rate band will remain frozen until April 2031. The individual nil-rate band has been fixed at £325,000 since 2009-10. Maintaining this threshold will inevitably pull more estates into scope as property values and inflation rise.

Earlier this year, draft legislation proposed that the new £1 million allowance for agricultural and business property relief would be indexed annually from 2030 onwards in line with the Consumer Prices Index. That plan has now been scrapped – the allowance will remain frozen until April 2031, along with the £2 million taper threshold for the residence nil-rate band. 

As mentioned, the most positive news is that the government has reversed its stance on agricultural and business property relief allowances. The £1 million allowance, due from April 2026, will now be transferable between spouses and civil partners. This is welcome, as that restriction would have simply punished families who were poorly advised or not advised at all.

There were a range of more technical changes to IHT but confined to fairly specific areas such as indirect holdings of agricultural land and buildings. Of more general interest will be that executors / personal representatives of estates will be able to direct pension scheme administrators to withhold benefits for up to 15 months and to pay IHT liabilities which may arise after the 2027 changes direct to HMRC (and pension providers will be relieved that there will be a mechanism for them to apply to HMRC for clearance that they have discharged their liabilities).

Mansion Tax / HVCTS

The tax surcharge on homes with a valuation of over £2 million is not a surprise announcement, following weeks of speculation after the Mail on Sunday's leak of the proposals about a “mansion tax”. The Budget document describes the average Band D family home as paying more in Council Tax than a £10 million property in Westminster, so this government is introducing a High Value Council Tax Surcharge on homes worth over £2 million.

From April 2028, owners of properties valued above the £2 million threshold will pay the surcharge in addition to Council Tax. Charges will start at £2,500 per year, rising to £7,500 for properties valued above £5 million. The Valuation Office will conduct a targeted valuation exercise to identify properties in scope. Revaluations will be conducted every five years. 

ISAs

The Chancellor was keen to highlight that she was keeping the annual ISA subscription limit at £20,000. However, to incentivise investment, the annual ISA cash limit will be reduced to £12,000 from April 2027 for those under 65. That means that adults under 65 can put £12,000 cash a year into an ISA, and another £8,000 into a stocks and shares ISA.

Again, note that the subscription limit of £20,000 remains frozen and does not increase!

Pensions

There is no change to the 2024 Autumn Budget announcement that from April 2027 unspent pensions will be included in estates for IHT (see 'Inheritance Tax' above). However, pensions will take a hit for many as contributions to pensions as part of salary sacrifice schemes will only see relief from employee and employer NICs for up to £2,000 from 6 April 2029. Businesses will suffer from the corresponding increase to their tax burden.

Enterprise Management Incentives, Enterprise Investment Scheme and Venture Capital Trusts

For entrepreneurs, one positive was a focus on issues relating to scale up of UK businesses. The UK has historically enjoyed a strong record on start-ups, however, bringing business to the next level and scaling up to greater commercialisation has long been an issue. Two measures introduced in the Budget are designed to facilitate this scaling-up issue.

From April 2026 qualifying companies which will be able to grant EMI options will include those with up to 500 employees (currently the limit is 250), those with gross assets of £120 million (currently £30 million) and existing shares under option of £6 million (currently £3 million). This will allow for a greater number of growing businesses to further incentivise key staff. Notification requirements will also be removed from April 2027, thereby reducing compliance costs.

Meanwhile for investors thresholds will be made more generous for investments made under the Enterprise Investment Scheme (EIS) or by Venture Capital Trusts (VCT). The investment limits for EIS and VCT companies will be increased to £10 million and for knowledge intensive companies will be increased to £20 million, and the company lifetime limit for receipt of such investments will increase to £24 million and £40 million respectively. From April 2026, the gross assets threshold will rise to £30 million prior to an investment and £35 million after investment under any of these schemes.

VCT income tax relief will, however be lowered from 30% to 20%.

Employee Ownership Trust (EOT) relief

The Government is worried that this is getting too expensive. Accordingly, it is introducing measures to meaningfully limit the appeal of the existing regime. For qualifying disposals to EOTs made on or after 26 November 2025, relief will be halved:

• 50% of the gain on such disposals will be treated as the seller's chargeable gain for capital gains tax (CGT) purposes – and broadly Business Asset Disposal Relief and Investors’ Relief will not be available on disposals where EOT relief has been claimed;
• the remaining 50% of the gain will not be chargeable at the time of disposal but will continue to be held over and deducted from the EOT trustees’ base cost, to come into charge on any subsequent disposal or deemed disposal of the shares by the trustees.

Details on the practical application of this change are scant at the moment. For example, would there be a mechanism for deferral of the liability (or part of it) to match the payments of consideration over a number of years? While it seems those who have completed their disposals are unaffected, it also appears likely that these changes will significantly reduce the uptake for new EOT structures.

Non-domiciled / non-resident clients, the new 2025 tax regime and a new tax offer?

Tucked away in the measures are provisions that will apply to trusts funded by non-UK domiciled individuals before 30 October 2024, and which will provide "partial grandfathering" by operating to limit IHT exposure under the periodic trust charging regime to £5 million over ten years (which will benefit trusts worth £80 million or so). This will have retrospective effect and will apply from 6 April 2025.

Other technical changes are being made to non-resident CGT to counter the use of protected cell companies, and to the new post-6 April 2025 tax regime, including the regime for new arrivals to the UK, overseas workday relief, and the temporary repatriation facility. Many of these changes will also have retrospective effect and will apply from 6 April 2025.

Technical changes are also to be made to the way that the temporary non-residence (TNR) rules interact with post-departure trade profits and to the entitlement of non-resident individuals to dividend tax credits.

A lighter note was however struck by the announcement that the Government wishes to "further develop" its tax offer for high-talent new arrivals. This is expressly with a view to the UK being competitive in terms of attracting internationally mobile individuals to establish themselves and their businesses in the UK. The Government will seek views, so here is one: how about an extended version of the new arriver regime with meaningful tax reliefs for qualifying individuals which are tied to investments in UK businesses. (You might almost think we've suggested this to the Government before.)

Conclusion

It has long been expected that this Government was focused on increasing tax payable on "income from assets" such as rent, dividends and interest. This Budget has indeed targeted landlords and investors but has also (necessarily given the public finances) spread the net wider. It will affect many – from the landlords and investors who will face higher rates and those who suffer the new mansion tax once introduced, to many more who will pay more tax due to fiscal drag and pension changes, and the corresponding hit for businesses. The Chancellor made a point of "asking everyone to make a contribution". Almost everyone will.