UK budget tax reforms – the slow and stealthy pain

The UK’s 2025 budget may seem mild compared to last year’s sweeping tax changes – but don’t be fooled. Both the 2024 tax reforms and the latest round will prove painful over time. The freeze on income tax allowances acts as a stealth tax, quietly increasing your liability over time. Other hikes are backloaded, set to bite later in this parliamentary term. In the future, your beneficiaries will probably pay much more inheritance tax than you ever imagined.

UK residents should review their tax and wealth strategies now to limit the impact.

If you live abroad, or plan to, think carefully about leaving assets behind since they will be unnecessarily exposed to UK taxes. Property, for example, remains vulnerable to multiple reforms and pensions is another area where reforms are hitting hard.

With the UK’s tax burden projected to hit a record 38.3% of GDP by 2030/31, now is the time to act to protect your wealth and legacy.

An income tax rise by another name

Chancellor Rachel Reeves’ pre-budget speech on 4 November hinted at income tax changes. In the end, she avoided a headline-grabbing rate hike, but extended the freeze on personal allowance and higher-rate thresholds. The result? A stealth tax with the same effect.

This painful measure was initiated by the Conservative government in April 2021, and the Labour administration quickly embraced it. The freeze was scheduled to end in 2028, but Ms Reeves pushed it to April 2031.

As wages and asset values rise with inflation while allowances stay static, more of your income falls into taxable brackets—an effect known as fiscal drag. You pay more tax, and less of your income is available to spend or invest.

If thresholds had risen with inflation as they are meant to, they would look very different today – and even more so by 2031:

The Office for Budget Responsibility estimates that this 10-year freeze will raise £56 billion, with £12 billion coming from Reeves’ extension alone. Since 2021, 8.3 million more people pay a higher rate – a 45% increase. By 2031, another 5.2 million will pay income tax, 4.8 million will hit the 40% band, and 600,000 will pay the 45% additional rate.

High earners are hardest hit: according to FT Adviser, someone earning at the higher rate since 2021 will pay £28,000 more than if thresholds had tracked inflation.

What about savings and investment income?

Rachel Reeves has been clear that wealthy people and families will pay the most, and tax rates on savings, capital gains, dividends and property have all risen.

It’s worth pointing out that neither the savings allowance nor the nil-rate savings band have increased since they were introduced in 2016 and 2015.

It’s worse for dividends and capital gains. The dividend allowance was introduced in April 2016 at £5,000 but is now £500. The capital gains tax annual exempt amount was cut from £12,300 in 2022/23 to £3,000 from 6^th April 2024.

Inheritance tax pain

Inheritance tax receipts have been on an upward path for 20 years, a trend which will accelerate in the coming years.

The nil-rate band has been frozen at £325,000 since 2009, and the 2025 budget extended it again to 2031.  If it had risen in line with inflation, it would be around £517,000 today. For a couple fully utilising both personal nil-rate bands, that’s an extra £384,000 you could have left to your heirs tax free.  And there is another five years of freeze to go.  The residential nil rate band helps improve the tax liability for your lineal descendants, but it is also frozen until 2031, plus it tapers away for estates over £2 million.

To make matters significantly worse, thanks to a 2024 budget measure, your UK pension funds start to form part of your estate for inheritance tax from April 2027.

While British expatriates may currently be able to keep UK assets below or close to the IHT threshold , this may be impossible once your pensions are included.  Remember, in most cases your UK inheritance tax liability will cover worldwide assets for up to 10 years after you leave the UK, but after that only assets situated in the UK remain liable.  This presents significant estate planning opportunities if you dispose of UK assets.

Property – a tougher tax environment

If you own property as an investment or hang onto UK property although you have moved abroad permanently, it may be time to reconsider. The UK has introduced a series of tax and regulatory changes over the past decade that make owning and letting out residential property significantly less attractive. These reforms have increased costs, reduced tax efficiency, and introduced greater administrative and compliance burdens. UK residential property is also now fully within the scope of inheritance tax, regardless of ownership structure.

While in the past, non-residents selling UK property were exempt from UK capital gains tax, this changed in April 2015 when they began being taxed on the gains made on residential property since that date. The same applies for commercial property from 2019.

And starting April 2028, properties in England valued over £2 million will be hit by the new ‘mansion tax’.

When it comes to renting out property, many landlords – especially those living overseas – are finding that the risk-reward balance of property investment has shifted unfavourably. They now face higher income tax, capital gains tax and stamp duty liabilities, as well as restrictions on mortgage interest relief and the loss of favourable treatment for furnished holiday lets.  Thay also deal with heavier regulation and lower flexibility, plus increased HMRC scrutiny.

These combined pressures have made it harder to achieve the returns seen a decade ago. Profit margins are tighter, risks are higher and administrative workloads heavier. Many landlords now conclude that the effort, cost and risk no longer justify the returns. Your capital could be invested much more effectively and tax-efficiently elsewhere.

Take control of your tax future

The UK’s tax landscape is shifting in ways that will quietly erode wealth over time. From frozen allowances and fiscal drag to harsher rules on pensions, property and inheritance, these changes demand proactive planning. Waiting until reforms fully bite could cost you  – and your heirs – far more than you expect.

At Blevins Franks, we specialise in helping UK residents and expatriates navigate complex tax rules and protect their wealth. Every situation is unique, so tailored advice is essential. Contact us today to review your tax and estate planning strategy and ensure your assets are structured as efficiently as possible for the years ahead.