UK Budget 2025

After months of speculation and panic over potential exit charges, higher capital gains tax rates and further inheritance tax reform, Rachel Reeves’ second Budget proved something of an anti-climax.  The impact was further diluted when the Office for Budget Responsibility accidentally published its forecasts online, revealing the key measures ahead of her speech.

The biggest revenue-raising measure in yesterday’s Budget was the extended freeze on income tax allowances, which is expected to generate an additional £8 billion by 2029/30. Combined with the 2% increase in tax rates for property, savings and dividend income, which are expected to raise £2.1 billion, these income tax measures together represent the primary sources of additional revenue.

The second largest contributor, projected to raise £4.7 billion of additional national insurance contributions (“NIC”) by 2029/30 is the new annual £2,000 cap on salary sacrifice pension contributions from April 2029, which will limit the benefit of salary sacrifice arrangements, the use of which has grown significantly in recent years. Employers may need to explore alternative ways to benefit their employees, as this change could create challenges for them.

Some of the key measures announced are outlined below.

Individuals

• The freeze on income tax and NIC thresholds will be extended to 2030/31. This measure will drag more people into the tax system or into higher tax brackets each year as their pay increases.
  
  
• There will be an increase in basic and higher rates of tax on property, dividends and savings income by 2% resulting in a top rate of tax of 47% for property and savings income from April 2027.  Finance cost relief will be provided at the separate property basic rate of 22%.
  
  
• Pension contributions via salary sacrifice will be capped at £2,000 a year before NIC applies meaning that contributions above £2,000 can still be made but will incur employer and employee’s NICs in the same manner as regular pension contributions. However, contributions through salary sacrifice, like all pension contributions will still be exempt from income tax (subject to the usual limits).
  
  
• A new High Value Council Tax Surcharge (“HVCTS”) will be applied to residential property in England worth £2 million or more in 2026, taking effect in April 2028. A public consultation on details relating to the HVCTS will be held in early 2026. 
  
  
• A change in the temporary non-residence rules closes a loophole and ensures that individuals cannot avoid UK tax on company distributions by timing profits after departure. This may affect planning for those considering temporary non-residence.
  
  
• Legislation will be introduced in the Finance Bill 2025/26 amending the “property richness” test for non-resident CGT purposes, so that for Protected Cell Companies (“PCCs”), each individual cell will be assessed separately, rather than the PCC as a whole. The measure will primarily affect businesses using PCC-based avoidance schemes but will also provide greater clarity in the tax code.,
  
  
• An existing Extra-Statutory Concession for non-UK residents investing in Collective Investment Vehicles, removing the need to make a double tax treaty claim by return, will be formalised into law.
  
  
• The inheritance tax nil rate band threshold, the residence nil rate band threshold and taper, and combined £1 million allowance for agricultural and business property relief will remain frozen for a further year until 2031. The £1 million allowance will, however, now also be transferable between spouses - a welcome change for many.
  
  
• Several inheritance tax anti-avoidance measures have been announced including:
  
  
  • Extension of property look-through rules: current rules prevent individuals or their trusts from using offshore structures to remove UK residential property from the scope of inheritance tax. This treatment will now be extended to UK agricultural property.
    
    
  • From 6 April 2025, the test for whether an individual’s non-UK personal or trust assets are in scope for inheritance tax is whether they are a long-term UK resident, i.e. broadly whether they have been resident for at least 10 out of the previous 20 years. There may be a charge of up to 6% when non-UK property in a trust goes out of scope of inheritance tax because of the change in status of the settlor. A new anti-avoidance measure will prevent trustees seeking to avoid this by bringing assets to the UK before the change in the settlor’s status, and then after the change siting the assets overseas again where they are outside the scope of inheritance tax.
    
    
• From 26 November 2025, 50% of the gain on the disposal of qualifying shares to the trustees of an Employee Ownership Trust will be treated as the disposer’s chargeable gain for capital gains tax purposes. The remaining 50% of the gain will not be chargeable at the time of disposal but will continue to be held over to come into charge on any future disposal of the shares by the trustees of the Employee Ownership Trust.

Businesses

• Reduction in the rate of writing-down allowance on the main pool of plant and machinery from 18% to 14% per year
  
  
• Introduction of a first-year allowance (“FYA”) of 40% for main rate expenditure, with reduced restrictions compared to other FYAs, to encourage investment where those FYAs are not available, such as for assets bought for leasing and by unincorporated businesses. This replaces a 100% FYA and so for many businesses the combined effect of these two measures will be a reduction of the speed at which they get tax relief for capital expenditure (albeit the Annual Investment Allowance of £1m will remain available in many situations).
  
  
• A doubling of the automatic penalties for late filing of corporation tax returns. The basic penalty will increase from £100 to £200, rising to £400 if more than three months late. For three successive failures, these penalties will increase to £1,000 and £2,000 respectively.

Other matters

Other key measures worth noting include:

• Following the 2024/25 call for evidence, the UK Government plans to simplify offshore anti-avoidance legislation to make it “fit for modern needs”. HMRC has stated that it will adopt a co-creation approach, working with a small group of external experts and engaging wider stakeholders to shape these reforms.
  
  
• An introduction of a new cap on relevant property inheritance tax charges for trusts which held excluded property on 30 October 2024.  The relevant property charges are capped at £5 million over each 10-year cycle.  This cap applies to settled property which was excluded property on 30 October 2024, and that is situated outside the UK at the time of the relevant charge.

KPMG comment

While headline-grabbing reforms such as exit charges and major capital gains tax increases did not materialise, the Budget introduced targeted changes across income tax, pensions, inheritance tax and anti-avoidance rules which makes it another interesting UK fiscal event from a Crown Dependencies tax perspective.

Speculation around the potential introduction of an exit charge for individuals leaving the UK has recently prompted another wave of high-net-worth individuals to relocate ahead of Budget Day. 

The continued freeze on personal allowances and inheritance tax thresholds coupled with rising tax rates for property, savings and dividend income, in particular a top rate of 47% for property and savings income, as well as the newly introduced HVCTS (or “mansion tax”) stand in direct contrast to our islands’ favourable tax regimes. 

As such, these changes, together with the continued sense of uncertainty surrounding the UK tax system, are not likely to dampen the recent enthusiasm shown by UK residents, particular high net-worth individuals, to consider a move to a more stable and benign tax jurisdiction. 

If you are concerned about how the changes will impact you and/or your clients, please contact us.