The Budget was a quieter affair from a personal finance perspective relative to recent years, but there were measures to assist first-time buyers, a targeted package to help with the cost of living and a few tweaks to taxes and allowances.
ISA allowances remain the same and reduction to Cash ISA allowance scrapped
There were no changes to the ISA rules, and the chancellor even scrapped the planned reduction of the annual Cash ISA allowance for under-65s to £12,000 – preserving the status quo for savers. The limit was set to be reduced from April 2027 under plans by previous chancellor Rachel Reeves, with the aim of encouraging more savers to put their money into UK stocks.
Flip-flopping on tax policy is rarely helpful. Many savers will already have prioritised Cash ISAs this tax year or transferred money into cash products on the assumption that a lower allowance and restrictions on ISA transfers were due to take effect from next April. However, the proposed Cash ISA reforms were complex and would have removed important flexibility from the ISA system, making it harder for people to adjust their strategy as their circumstances, goals and tolerance for investment risk changed over time.
Yet, it remains the case that too many people hoard too much cash that could be put to better use. At the same time, many British companies need more capital to help them grow and thrive, so it’s perhaps a subject the current chancellor will return to at a later date.
Higher income tax on unearned income
In last year’s Budget, Rachel Reeves announced an increase of 2% to rates of income tax on savings and rental income from April 2027. That will now be a 4% increase, taking rates on these forms of income to 24%, 44% and 49%.
This continues the trend of less favourable tax treatment for investment income outside of tax-efficient wrappers, such as ISAs and pensions. Dividend income, however, is left alone, which will be a relief to investors who have had to withstand a significant rise already.
New first-time buyer ISA
Further details of the First Time Buyer (FTB) ISA – the replacement to the current Lifetime ISA (LISA) available from April 2029 – have been set out. Overall, it’s a simpler, home-purchase-only savings vehicle, rather than combining house purchase and retirement saving elements as the LISA does.
Like the LISA, the product will be available to eligible first-time buyers from age 18 and come in Stocks & Shares and Cash versions. The product retains the limit of £4,000, which makes up part of the £20,000 ISA allowance for those eligible for the product. A crucial difference is that there is no upper age limit, an alteration from the LISA, which can only be opened before age 40.
The 25% government bonus will be paid on the value of the account balance when funds are withdrawn for a qualifying first home purchase, up to the value of £450,000 – the same level as the LISA. If funds are taken out for another purpose, the saver simply forgoes the bonus.
Private pensions
There were no changes to main pension rules and allowances. Notably, the tax-free cash entitlement remains 25% of pension benefits, subject to a maximum cash amount of £268,275. There were no changes to income tax relief.
Outside of developments in this Budget, some changes to the taxation of pensions are already in train. From 6 April 2027, most unused pension funds and death benefits will be included in a deceased person’s estate for inheritance tax purposes. And from April 2029, the amount of National Insurance (NI) relief workers can get by ‘sacrificing’ salary into their pensions will be capped. Only the first £2,000 of salary sacrificed each year will continue to benefit from NI savings.
Property
There were further details of the Your First Home scheme, aimed at helping first-time buyers in England to purchase a property. The scheme provides a loan equivalent to 20% of the property’s value and allows people to buy a new-build home with a deposit of 2.5%. The income threshold for eligibility is set at £110,000 outside of London, and £140,000 within.
State pension
The expected earnings-linked uplift to the new state pension was confirmed, with the full payment rising an inflation-busting 3.9% from £12,548 to £13,036 next April – an extra £40 a month.
That puts it above the income tax personal allowance of £12,570 – the slice of income on which there is no tax to pay – for the first time, which would have dragged thousands of low-income pensioners into paying small amounts of tax. To counter this, the chancellor announced an effective rise in the tax-free allowance for low-income pensioners to £13,036.
Importantly, this includes pensioners receiving income from other sources, provided their total income remains below the threshold. To avoid a cliff-edge scenario whereby the higher tax-free allowance is suddenly lost, it will be gradually withdrawn for incomes a little over £13,036 through a taper.
There will be no immediate changes to the triple lock – under which the state pension increases each year in line with the highest of earnings growth, inflation or 2.5%. However, the Prime Minister previously announced that from April 2030, the lock will be adjusted. Each year, the state pension will increase by the highest of inflation or 2.5%, while also holding its value relative to earnings over time. The government has said the change could save up to £15bn a year by 2040. While the new policy will not come into force until April 2030, and is therefore contingent on the Labour party being re-elected, or another party agreeing to it, the government has said it plans to legislate in advance for the change.
Rob Morgan is chief investment analyst at Charles Stanley Direct, part of Raymond James. The views expressed above should not be taken as investment advice.