Five key financial planning takeaway from the Budget

Emma Sterland, Chief Financial Planning Officer at leading wealth management firm Evelyn Partners picks out some of the key financial challenges thrown up by last week’s Budget and what families can potentially do about them.

1. Sacrifice your salary while you can?
2. Review your dividend policy – and your investments
3. Review your cash savings and ISA strategy
4. Are you ‘relieved’ by the Inheritance Tax update?
5. Is property still working for you?

Emma Sterland says: ‘As the dust settles on the Budget, we can take a more measured view and start planning the best way forward for families and their financial plans. Various changes will impact our clients and households across the UK, but many won't take effect for a couple of years or more, so there is time to prepare and build a robust plan.

‘Frustration might be felt among those middle-to-high earners who will be most affected by the biggest tax rise in the Budget – the further extension of the freeze to the personal allowance and higher and additional rate thresholds for another three years to 2031. This is not easy to mitigate and a favoured option, salary sacrifice into workplace pensions, will be limited from 2029. But there are still useful steps that can be taken to retain more of your earned income.

‘As earners drift into the higher tax brackets, they will also face higher tax rates and lower allowances for savings and investments, so using allowances efficiently and good tax planning will be more important than ever – with more options open to couples in marriages and civil partnerships.’
 
1. Sacrifice your salary while you can?

The Chancellor announced that, from April 2029, National Insurance relief on salary-sacrificed pension contributions will be capped at the first £2,000 per year. Any amount above this threshold will attract standard employer and employee NICs, reducing the benefit of salary sacrifice for higher contributions.

Emma comments: ‘This move will not be great news for those still accumulating savings in salary sacrifice pension schemes and those looking to avoid big marginal tax steps like that at £100,000 when their personal allowance starts being tapered down.

‘There is still a lot of uncertainty around the effect the cap will have, with some firms likely to react differently to others in terms of how they reform their pension and payroll systems, as well as pay and benefits.

‘Some employers might reduce their top-up contributions, some may look at running dual schemes, with salary sacrifice up to the £2,000 limit, whilst some might cease to offer salary sacrifice altogether. The OBR has assumed employers will seek to pass on around three-quarters of the additional cost to employees, half of which would be through lower pension contributions and half through lower salaries and bonuses.

‘However, looking to the positive, the measure does not come in until April 2029, and both employees and business owners have more than three years to take advantage of salary sacrifice.

‘Some savers and business owners who benefit greatly from the system might think about frontloading pension contributions over the next few years, if their cash flow allows. This could be powered up by carrying forward any unused allowances from the three previous years. This might be an easier choice for those closer to retirement as there is less jeopardy, in terms of access to funds, from locking up savings in a pension, rather than say an ISA.

‘It’s especially advisable for business owners to consider this, as they can potentially benefit from both ends of the salary sacrifice arrangement – the 15% employer relief on NI as well as the 8% and 2% employee rates. For a small business owner, making large pension contributions may also lower profits which are in turn subject to corporation tax.

‘However, those making big pension contributions in a short period of time need to be careful: the total amount paid into a pension cannot exceed relevant earnings in the same tax year, and the calculations around this are not as straightforward as they might seem, which is why professional advice is recommended, especially for business owners.

‘Earners who quite sensibly use salary sacrifice to mitigate the more severe tax steps in the UK system – such as the effective 62% rate for earnings between £100,000 and £125,140 – should not despair. Salary sacrifice, if available, is worth taking advantage of until 2029 but the extremely valuable benefit of tax relief at the higher and additional rates remains regardless of which kind of workplace scheme or personal pension that you’re in.

‘And even non-sacrifice pension contributions can help to mitigate such cliff-edges by reducing adjusted income.’

2. Review your dividend policy – and your investments

The Budget ruled that from 2026-27, the dividend tax rate for basic rate taxpayers will be increased by 2 percentage points to 10.75% and that for higher rate taxpayers will be increased by 2 percentage points to 35.75%. The additional rate will remain unchanged at 39.35%. This will take effect from 6 April 2026.

Emma comments: ‘The increasing tax pressure on dividends could have consequences for both business owners and investors. The annual allowance now protects just £500 in dividends (as recently as 2017/18 it was £5,000), and the tax rates for basic and higher-rate taxpayers are now going up by two percentage points next April. This will demand a rethink both from business owners who pay themselves partially or wholly in dividends and from investors holding assets outside of tax wrappers.

‘As dividends also come out of taxed profits, it could be advisable for some entrepreneurs to take more of their remuneration as salary, although this could mean less flexibility. Many business owners prefer dividends as it allows them to take greater amounts from their company in good years than bad. Professional advice will help to get the optimum balance between dividends and salary.

‘As for those being paid dividends from investments, the incentive is now even greater to ensure these are tax protected in ISAs, pensions or offshore investment bonds. People who own listed company shares or income-generating equity funds, may have the option of migrating these into an ISA, by selling some or all of them – ideally not exceeding their annual capital gains exemption of £3,000 in the process – and then repurchasing them in a Stocks & Shares ISA. This is a process known as “Bed and ISA” and it will ensure that future dividends and income distributions from these investments will be protected from taxation on both income and capital gains.

‘Married couples have the option of using two sets of dividend allowances, two annual capital gains exemptions and two ISAs, and can also taking advantage of “interspousal transfers” to share assets tax-efficiently.’

3. Review your cash savings and ISA strategy

The Budget announced a cut to the amount that can be saved into Cash ISAs, which will be reduced to £12,000 from April 2027. Over 65s will be exempt from the reduction and will still be able to subscribe up to £20,000 of the overall ISA allowance to cash.

Emma says: ‘For now, savers and investors can still put up to £20,000 into ISAs in both the current and next tax year, leaving couples a potential £80,000 of overall ISA allowances, across cash and investments. The Junior ISA allowance was untouched so that adds another £9,000 for a family to save or invest tax-efficiently if they have children under age 18.

‘Individuals and families who want or need to hold substantial cash savings outside of their ISAs must also be aware that the rate of income tax on savings is going up, while the personal savings allowances will remain frozen.’

The Budget announced that from 2027-28, the savings basic rate will be increased by 2 percentage points to 22%, the savings higher rate will be increased by 2 percentage points to 42% and the savings additional rate will be increased by 2 percentage points to 47%. This will take effect from 6 April 2027.

Emma continues: ‘For higher rate taxpayers with just £500 savings allowance and additional rate taxpayers with none, this is a bit of a warning shot that holding large amounts of cash in bank deposits could be costly in the future. Couples who have used up their personal savings allowances could make sure taxable savings are held by the lower-rate taxpayer. But after tax the returns on cash will struggle to beat inflation, especially as interest rates are expected to come down further.

‘Options for those who don’t have their investments managed for them include holding short dated bond funds in a stocks and shares ISA – although there is some uncertainty around. Premium Bonds are not everyone’s cup of tea, but prizes are tax-free, they are pretty much easy-access, and larger holdings in particular tend to revert to mean over time in terms of the rate of return.

‘However, those with substantial cash balances to park really can benefit from more sophisticated investment strategies, especially if a tax-efficient income from the funds is priority. Gilts are exempt from capital gains tax and currently there are many trading on the secondary market at discounts to the value they will mature at. This makes them a tax-efficient option, especially for those subject to the higher and additional tax rates.

‘Wealth managers can also offer more sophisticated cash-adjacent portfolios that are designed for investing large cash sums in assets at the lower end of the risk and volatility scale (like short-duration bonds, T-Bills and other cash-adjacent vehicles) while retaining access and tax-efficiency.

‘Combined financial planning and investment management advice come into its own once the obvious allowances have been used up, especially where large sums are involved.’

4. Are you ‘relieved’ by the Inheritance Tax update?

The Budget last week ruled that any unused £1million allowance for the 100% rate of agricultural property relief and business relief will be transferable between spouses and civil partners, including if the first death was before 6 April 2026. This will take effect from 6 April 2026.

Emma comments: 'There will be sighs of relief for many family businesses in the farming community and other sectors following this update to Inheritance Tax relief reforms. While the October 2024 announcement reducing business and agricultural property reliefs will still pose IHT challenges for many businesses, the update last week that the £1million relief can be passed on to a spouse is hugely welcome and will make estate planning for many families more straightforward.

‘The October 2024 Budget announced that only the first £1million of agricultural or business assets combined will from April 2026 qualify for 100% relief, with the remainder getting only 50% relief, i.e., IHT at 20%. This will be tricky enough in itself for many farms and other family businesses to navigate but for those not owned by both spouses, but rather in the name of only one spouse, there would have been particular challenges.

‘Under the original draft legislation, the allowance was explicitly not transferrable between spouses, unlike the IHT nil rate band and residence nil rate band, and this was the source of much dispute around how many businesses and farms would be hit by the reduction in reliefs. It worsened the potential impact of the policy for many businesses, and also meant that businesses of lower value would be affected.

‘For our clients, some quite involved estate planning reviews were put into action. For each spouse to benefit from the £1million allowance the ownership would need to be changed so that both spouses owned a share of the business and their Will would need to be redrafted to leave that share to someone other than their spouse on first death. Otherwise, the IHT bill for many farms and other businesses could have been such that the business and/or land would have to be sold off.

‘This has now been addressed in the Budget, allowing any unused £1million allowance at the first death to be transferred to the surviving spouse on death, making estate planning for such businesses a lot less complicated. As it applies if the first death was before 6 April 2026, this revision to the IHT rule will benefit those who were unaware of the need to amend their Wills, or weren’t able to amend their plans in time.’

5. Is property still working for you?

The Budget announced a new high value council tax surcharge which has widely been dubbed a ‘mansion tax’. From April 2028, owners of properties identified as being valued at over £2million by the Valuation Office (in 2026 prices) will be liable for a recurring annual charge which will be additional to the existing council tax liability. There will be four price bands with the surcharge rising from £2,500 for a property valued in the lowest £2 million to £2.5 million band, to £7,500 for a property valued in the highest band of £5 million or more, all uprated by CPI inflation each year.

Emma says: ‘Some asset-rich but cash-poor families living in high-value homes will need to budget for a significant extra annual expense, and if necessary a suitable investment strategy could be put in place to provide the required income.

‘This is bound to skew the housing market at certain levels but the impact on families with high-value properties will vary – after all there can be a strong emotional attachment to a home that will outweigh any financial consideration. II’s quite possible that this could spur more, especially older, homeowners to think about downsizing, perhaps with a view to making gifts to family. The question is, whether homes just above one of the new bands for the levy will fetch the price their owner had envisaged.

‘As for those receiving rental income, the extra 2p on income tax might lead to yet another reassessment of whether being a landlord is “worth it”.’

From 2027-28, the property basic rate of income tax will be 22%, the property higher rate will be 42%, and the property additional rate will be 47%. This will take effect from 6 April 2027.

Emma continues: ‘Small scale and so-called “accidental” landlords might decide this is the last straw in terms of having money tied up in an asset that is proving a lot less tax-efficient than it was 10 or 15 years ago, not to mention the recently passed Renters Rights Act, which has strengthened the hand of tenants.

‘With property values in many areas of London and the South East lagging general inflation recently some second and third property owners may just decide they’ve had enough – particularly given the potential hassles of renting out property. They might also have been eyeing the significant gains in global equity markets in recent years – although they are of course not guaranteed to continue – and decide there is a more productive home for their money.

‘However, the emotional appeal of having a second property will for many trump a loss of profitability, and there are often good personal reasons for keeping hold of a rental property, for instance if it's a holiday home that they also use themselves.

‘The 2p tax hike will hit profitability for buy-to-let landlords, and it could be the final straw for some, so the trend among private property investors exiting their portfolios in recent years is unlikely to reverse.  It will leave higher and additional-rate taxpayers who own properties in their own name even more out of pocket, after a number of unfavourable tax and regulatory changes in the last 10 years or so.

‘We could however see an increase in incorporation as company landlords can still fully deduct mortgage interest from rental income when working out their taxable profits, and can also offset other expenses such as replacement fixtures. Incorporation however can come with large upfront costs, with potential stamp duty and capital gains liabilities. Not forgetting that corporation tax would be due on profits and any withdrawals from the business would then be taxable for the individual, despite this, the data suggests buy-to-let company incorporations are already at post-financial crisis highs.

‘We are a long way from the buy-to-let heyday of the first decade of this century, and many of those holding rental properties – whether they are professional or “casual” landlords – will be looking at the comparative attractions of other investment assets.’