10:28 pm - February 4, 2026
The UK Budget has introduced significant tax changes that will affect millions of households across the country. Income tax thresholds frozen until 2031, reduced Cash ISA allowances, and increased dividend tax rates are among the key measures announced. However, taxpayers can take strategic steps to minimize their tax burden through careful financial planning and by making full use of available tax-efficient investment options.
The Chancellor confirmed that income tax and National Insurance thresholds will remain frozen for an additional three years until April 2031. This extension means more workers will be pushed into higher tax brackets as wages increase, a phenomenon known as fiscal drag that operates as a stealth tax without technically raising income tax rates.
Pension Contributions Remain Tax-Efficient Despite Changes
Making contributions to a Self-Investing Personal Pension remains one of the most effective strategies to reduce your income tax bill. According to financial advisers, pensions offer shelter from UK income and capital gains tax while helping savers prepare for retirement. Additionally, pension contributions qualify for tax relief at your highest marginal rate up to your annual allowance.
However, changes are coming to National Insurance relief on salary sacrifice contributions. From April 2029, the NI relief will be capped at the first £2,000 of contributions. Meanwhile, savers have nearly four years to maximize contributions under the current more generous system before these restrictions take effect.
Cash ISA Allowance Cut Targets Younger Savers
The Budget introduced a notable change affecting Cash ISA holders under age 65. From April 2027, the Cash ISA allowance will be reduced from £20,000 to £12,000 annually for younger savers. In contrast, those aged 65 and over will retain the ability to save or transfer £20,000 per year into Cash ISAs under separate rules.
Savers under 65 still have the current tax year and 2026/27 to maximize their £20,000 allowance before the reduction takes effect. Furthermore, the tax rate on savings interest outside tax wrappers will increase from April 2027, rising to 22% for basic rate taxpayers, 42% for higher rate taxpayers, and 47% for additional rate taxpayers.
Married couples and civil partners can mitigate these changes by sharing savings to utilize both partners’ ISA allowances and personal savings allowances. This strategy can significantly reduce overall tax liability on household savings.
Dividend Tax Increases Make Stocks and Shares ISA More Attractive
Investors face higher dividend tax rates from April 2026. The rate for basic rate taxpayers will increase from 8.75% to 10.75%, while higher rate taxpayers will see rates jump from 33.75% to 35.75%. These increases make tax-efficient investment wrappers increasingly valuable for protecting investment income.
A Stocks and Shares ISA offers complete protection from UK income tax, including dividend tax, and capital gains tax. Investors with existing holdings outside ISAs can use Share Exchange, sometimes called Bed and ISA, to transfer investments into the tax-efficient wrapper. This process allows investors to sell assets outside an ISA and repurchase them within an ISA in one instruction, sheltering them from future tax while respecting the £3,000 capital gains tax annual allowance.
Inheritance Tax Threshold Freeze Extended
Inheritance tax thresholds will now remain frozen until 2031, one year longer than previously announced. This extension will bring more estates into the inheritance tax net as property values and asset prices continue to rise over time.
Financial advisers recommend that individuals concerned about inheritance tax consider making lifetime gifts to reduce their potential tax bill. However, careful planning is essential to ensure donors retain sufficient resources for their own needs throughout retirement.
The full impact of these Budget measures will become clearer as implementation dates approach, particularly the 2027 and 2029 deadlines for various changes. Taxpayers have time to adjust their financial strategies, though consulting with a qualified financial adviser may help navigate the complexity of these overlapping tax changes.
