Tax increases scheduled for 2025 in six key areas.
Revamped article:
Brace yourself, folks! In 2025, expensive bills are on the horizon for the well-off and property investors alike.
Steep tax burdens await, thanks to Rachel Reeves’ first Budget as Chancellor, which packed a punch with various tax hikes and continued personal allowance freezes introduced by the former Tory administration.
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The mounting tax burden is expected even without explicit tax rate increases.
A glance at research by interactive investor indicates that a combination of limits on capital gains (CGT) and dividend allowances, higher CGT rates, and frozen income tax thresholds mean middle earners could see a £1,261 increase in their tax bill in 2025. The number escalates to £1,831 for those earning £50,000 and £3,836 for those earning £100,000.
Here's a breakdown of the taxes expected to rise in 2025.
Freeze on Income Tax Thresholds:
The Conservative government froze income tax allowances in 2021 until 2028. Chancellor Reeves has maintained this policy. Although it's not a tax hike per se, the looming risk is fiscal drag — people being propelled into higher tax brackets more quickly than usual as salaries grow in line with inflation. By 2027-2028, over four million additional taxpayers might be yanked in, surpassing the 40-million mark for the first time.
Rachael Griffin, tax and financial planning expert at Quilter, warned, "As wages increase in line with inflation, frozen tax thresholds will continue to drag more and more individuals into higher tax brackets until the end of the freeze and beyond, a phenomenon known as fiscal drag. Middle-income earners, in particular, will pay a higher proportion of their income in tax without experiencing any real improvement in purchasing power."
Griffin emphasized that this freeze would mainly hit middle-income households hardest, particularly those nearly touching the higher-rate tax bracket. She further commented, "Although these folks might not be wealthy, they are facing tax rates more typically reserved for higher earners. Given the persisting inflation and rising cost of living, households will feel the squeeze, and many could struggle to maintain their living standards as more of their income is taxed at higher rates."
Capital Gains Tax Adjustments
The Capital Gains Tax (CGT) rate was boosted in the Autumn Budget, rising from 10% to 18% for basic taxpayers and from 20% to 24% for higher and additional rate taxpayers. While this change took effect the day following the Budget, on 31 October, households will truly feel the impact in the first full year starting in 2025.
Sarah Coles, head of personal finance for Hargreaves Lansdown, noted, "Couples who strategize to ensure the lower earner pays any Capital Gains Tax will be particularly hard-hit due to the increased rates for these taxpayers."
Inheritance Tax Reforms
Inheritance tax (IHT) rates stay unchanged, but the £325,000 nil-rate band—the amount an estate can be worth before IHT is due—is frozen until 2029. From April 2025, Alternative Investment Market (AIM) shares will no longer enjoy IHT exemption, albeit the tax rate will be halved to 20%. Pensions are expected to form part of estates for IHT purposes starting 2027, altering financial planning strategies.
Farmers and land investors are also on the brink of larger tax bills.
From April 5, 2026, agricultural and business assets will qualify for 100% relief up to a cap of £1 million per person, exceeding the nil-rate band or £500,000 where eligible for the residence nil rate band as well. Above the £1 million cap, relief on eligible assets will apply at a rate of 50%, effectively imposing a 20% IHT rate.
Emma Sterland, chief financial planning director at Evelyn Partners, suggests sharing allowances and assets among spouses, as transfers can be made tax-free, and gifting can help reduce the IHT bill. She advises, "Could you start making regular gifts using the 'normal expenditure out of surplus income' exemption? Could you leverage your pension savings to start or boost the pension of a loved one, enjoying tax relief at their marginal rate? These questions have gained urgency in the wake of the Budget changes to IHT rules and reliefs, and those who currently benefit from the more generous business and agricultural property reliefs need a fresh assessment of their strategies, ideally with an adviser's help."
Stamp Duty Costs
The Budget also heightened the additional stamp duty rate from 3% to 5%, making it costlier for investors to acquire additional properties. Another stamp duty change looms in April.
Stamp duty thresholds are scheduled to drop in April, resulting in added costs for buyers. First-time buyer stamp duty exemption will drop from £425,000 to £300,000, and home movers will start paying the property tax at £125,000 instead of £250,000 currently.
Property website Zoopla anticipates that 83% of prospective homebuyers will shoulder more stamp duty costs in April 2025, up from the 49% of potential purchasers currently. Estate agents predict a rush among buyers to close purchases before the April deadline, or sellers may accept lower offers to offset the rise in property tax.
Higher Employer National Insurance Rates
Although the government reportedly pledged to not explicitly raise income tax, employee national insurance, and VAT, starting 6 April 2025, the rate of employers' national insurance contributions will climb from 13% to 15%, and the level at which employers start paying NICs for each employee tumbles from £9,100 to £5,000.
Critics argue that the increased costs will eventually be passed on through limited salary increases and higher prices for items.
Laura Suter, director of personal finance at AJ Bell, stated, "Although the smallest businesses will be shielded from some of these cost increases through the doubling of the Employment Allowance (from £5,000 a year to £10,500 annually), providing them with a tax break of up to £10,500 a year on their National Insurance bill, this measure will still push up substantial sums for the government—£26 billion by the 2029-2030 tax year, with £5 billion deriving from the public sector wage bill, counterbalancing some of the impact."
Council Tax Increases
Though council tax isn't technically under the control of the central government, the previous Tory administration did lift the limits on council tax hikes.
Rachael Griffin speculates, "Given that so many local governments have been wrestling to balance their budgets, it's likely that numerous town halls will opt for the largest possible increase."
In essence, the 2025 Budget unveiled tax-related changes by Rachel Reeves, targeting wealthier individuals and higher earners, primarily through income tax rate increases (potentially by 2p), closure of tax loopholes, and a focus on public investment benefiting working families. Middle-income households still face tax bill escalations that a lower interest rate environment may partially offset, whereas wealthier households will witness both increased taxes and the demise of several advantageous tax exemptions.
- Middle-income earners may need to reconsider their personal finance strategies, especially for property investments, as rising Capital Gains Tax rates and frozen income tax thresholds could increase their tax bills significantly by 2025.
- In the realm of business and personal finance, the anticipated tax reforms propose that wealthier individuals might face higher employer National Insurance contributions, surcharges on property acquisitions, and the inclusion of pensions in inheritance tax calculations.
- apart from tax adjustments, the future of savings and investments could be impacted, as changes in Inheritance Tax rules are expected to alter financial planning strategies, with a potential focus on utilizing pensions to lower the IHT bill and sharing assets among spouses.
