After months of speculation, the Chancellor of the Exchequer (Rachel Reeves) has finally delivered the UK’s budget for 2025.
But what you probably want to know is: how will these changes impact my plans for 2026? Here's what DC has to say:
"With the National Minimum Wage increase, SMBs must strategically review how to maximise their discretionary budget. The theme for next year for everyone will be how to do more with less budget, while doing better by their people. Prioritise the benefits that deliver genuine value & impact and that make financial sense for your business and your employees."
Jack Saunders – chartered financial planner, ilumiti – weighs in on what HR and Finance teams need to know.
The key annoucements for HR and Finance:
1. Pension salary sacrifice contributions above £2,000 a year won’t be exempt from National Insurance – from April 2029
This is the biggest headline for HR and Finance.
Employees and employers will continue to save National Insurance on all pension contributions made via salary sacrifice, all the way until 2029. That means there’s plenty of opportunity to save over the next 3 years.
But from 2029, only the first £2,000 a year will be exempt. National Insurance will be due on any contributions over that cap.
These changes only apply to pension salary sacrifice schemes. Other schemes remain unaffected.
"Employers and employees making use of pension salary sacrifice schemes should expect to pay more National Insurance from 2029. Ordinary employer pension contributions will remain exempt. There’s still a lot of uncertainty around reporting and compliance – so they should seek guidance and prepare well in advance."
2. Income tax thresholds will stay frozen until 2030-2031
Instead of increasing the rate of income tax (as rumoured) the government has decided to extend the freeze on tax thresholds.
The surprising news was how long that freeze will last: all the way until 2030/2031.
The result of freezing thresholds is fiscal drag – where people get pulled into higher tax bands as their pay increases. The impact is employees taking home less of their increased earnings.
Tax efficient solutions and salary sacrifice schemes remain an excellent way to help paycheques go further.
"This isn’t ideal for anyone. Freezing thresholds will feel like a tax hike for many, as people creep into higher thresholds over time. Employees may want to look at increasing their pension contributions in order to reduce their taxable income – but changes to pension relief make this a less attractive option too."
3. The National Minimum Wage and Living Wage are going up
As expected, the government is increasing the National Minimum Wage and the National Living Wage for those on the lowest incomes. Here are the numbers you need to know:
This is a nice increase for those who need it – and shouldn’t come as a huge surprise to employers. Here are the new numbers you need know:
National Living Wage (For employees over 21 years old)
- From: £12.21 an hour
- To: £12.71 an hour
National Minimum Wage (18–20 year olds)
- From: £10 an hour
- To: £10.85 an hour
These changes will squeeze budgets even further – forcing employers to try and do more with less money. But tax efficient solutions like salary sacrifice can help businesses offset the increase. Employers should seek independent financial advice to understand their best options.
4. New taxes for electric and hybrid vehicles
Drivers of electric and hybrid vehicles will face a new tax from April 2028. Electric vehicle owners will be charged 3p for every mile they drive, while hybrid owners will pay 1.5p.
Under the new measures, electric car drivers who clock up 8,500 miles a year will pay about £255 – around half the cost paid by petrol and diesel drivers in fuel tax.
That means electric vehicles maintain their cost advantage. You can read more about the proposed changes here.
5. Restrictions to cash ISAs
- Individuals can currently save up to £20,000 a year tax-free with a cash ISA.
- From 2027, this limit will be reduced to £12,000 for everyone under 65.
- To encourage investment, you’ll be allowed to save the remaining £8,000 using a stocks and shares ISA.
"I’m concerned this will discourage people from saving. The additional risk of a stocks and shares ISA could lead them to build up cash savings – which are then subject to tax.Employers should encourage their employees to seek trusted financial advice if they’re worried about the changes. There are still plenty of ways for individuals to save money in a tax efficient manner."