Budget 2026: why tax-efficient planning is becoming more important

When Chancellor of the Exchequer John Healey delivered his first Budget on 28 October, he avoided broad increases in the headline rates of Income Tax, National Insurance and VAT. For people building, investing or passing on wealth, however, it’s essential to look behind the main headlines. Several measures could have important consequences.

Taxes on savings and property income will rise from April 2027, the proposed reduction in the cash ISA limit has been abandoned, and business owners face changes affecting the tax treatment when they sell or gift their shares. Meanwhile, reforms already due to bring most unused pension funds into estates for Inheritance Tax remain a significant planning issue.

Another important factor is the tax-free Personal Allowance and tax thresholds which remain frozen until April 2031. This means that more people pay more tax as incomes rise.

The economic backdrop matters too. The Office for Budget Responsibility expects inflation to remain elevated and growth to slow in 2027 before recovering.

Seven key takeaways

1. Savings income tax rates will rise from 6 April 2027. The basic, higher and additional savings rates will become 24%, 44% and 49% across the UK. Property income will be taxed at the same level and apply in England, Wales and Northern Ireland.

2. The cash ISA limit will remain £20,000. The Government has withdrawn its planned reduction, preserving the ability to hold the full annual ISA allowance in cash.

3. The main Income Tax rates remain unchanged for 2027/28. Employment and pension income will continue to be taxed at 20%, 40% and 45% in England, Wales and Northern Ireland, although savings and property income will be subject to separate rates.

4. Business Asset Disposal Relief will become less generous. Its lifetime limit will fall from £1 million to £500,000 for qualifying disposals from 6 April 2027.

5. A proposed Founders’ Relief could help some entrepreneurs. The Government is consulting on a 10% Capital Gains Tax rate for up to £10 million of qualifying lifetime gains, but eligibility conditions are not yet final.

6. Pension and estate planning remain closely connected. Most unused pension funds and death benefits are already due to enter estates for Inheritance Tax from 6 April 2027.

7. The investment outlook remains uncertain. The OBR forecasts slower growth and above-target inflation in 2027, underlining the value of diversification rather than short-term market predictions.

Savings and ISAs: tax shelters become more valuable

From 6 April 2027, the savings basic rate will increase from 20% to 24%, the higher rate from 40% to 44% and the additional rate from 45% to 49%. Taxes on income from property will rise to the same rates.

At the same time, the Government has withdrawn its proposed restriction on cash ISAs. The overall annual ISA subscription limit will remain £20,000, and adults will continue to be able to place the full amount in a cash ISA if they wish.

Increased savings tax means it is more important than ever to take advantage of annual ISA allowances where appropriate. This may mean moving cash into a cash ISA or a Stocks and Shares ISA. Cash may be appropriate for emergencies and known expenditure. Investments offer the potential for higher returns and greater tax efficiency over the longer term, but their value can fall as well as rise.

It might be prudent to review how much cash you need readily available and whether ISA allowances are being used effectively across the household.

Income Tax: stable headline rates, different treatment by income type

The main UK income tax thresholds and the Personal Allowance will remain frozen until April 2031: the Personal Allowance remains at £12,570, the higher rate threshold at £50,270, and additional rate at £125,140 through April 2031.

For 2027/28, the main Income Tax rates applying to employment and pension income remain 20%, 40% and 45%. For taxpayers in England, Wales and Northern Ireland, the basic-rate band remains £1 to £37,700 of taxable income, the higher rate applies from £37,701 to £125,140, and the additional rate applies above £125,140.

A new Pension Tax Allowance will apply from 6 April 2027 until 5 April 2030. Its purpose is to Its purpose is to prevent pensioners from facing small Income Tax liabilities solely because State Pension increases take them above the Personal Allowance.

As ever, anyone drawing retirement income should consider how they do so in the most efficient way. Withdrawals from pensions, ISAs and taxable investments can have different consequences for tax, allowances and the sustainability of capital.

Inheritance Tax: pensions remain the central planning issue

Most unused pension funds and pension death benefits are due to form part of an individual’s estate for Inheritance Tax from 6 April 2027. For families with substantial pension wealth, this could have a greater impact on estate planning than the measures announced in this Budget.

Those with substantial pension wealth may wish to revisit their estate planning and consider their retirement spending strategy – in particular the possible order in which assets are drawn.

The tax rates and thresholds are unchanged. Standard Inheritance Tax nil-rate band remains £325,000 and the residence nil-rate band remains £175,000. (The residence nil-rate band begins to taper where an estate exceeds £2 million.)

Estate planning should not focus on tax in isolation and professional advice before taking action is recommended. A coordinated review can help identify whether existing arrangements still reflect the family’s intentions while taking into account the wider picture.

Tax changes for business owners and entrepreneurs

While the principal Capital Gains Tax rates remain unchanged, there are material changes for entrepreneurs. The government is making Business Asset Disposal Relief (BADR) less generous, while creating a much more generous regime for a narrower category of people who have built substantial, high-growth UK businesses.

For qualifying disposals from 6 April 2027, the lifetime amount of gains eligible for BADR will fall from £1 million to £500,000.

The Government is also consulting on the introduction of Founders’ Relief. This would provide a 10% CGT rate on up to £10 million of qualifying lifetime gains for eligible founders and early investors, applying to qualifying disposals from 6 April 2027.

As the Government is consulting on the detailed eligibility conditions, the precise scope of Founders’ Relief is not yet final.

The interaction between the various reliefs can be complex, particularly where shares are being transferred within a family rather than sold. Business owners considering a sale, gift, succession or restructuring may therefore wish to review the timing and ownership structure, and which reliefs might be available. Specialist tax and legal advice should be taken before making changes.

Pensions contributions and National Insurance

The Budget did not reverse the previously announced restriction on pension salary sacrifice. From 6 April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each year will remain exempt from National Insurance.

Contributions above that amount may continue to qualify for Income Tax relief under the normal pension rules, but employee and employer National Insurance will apply. The precise effect will depend on the scheme, employer policy and an individual’s circumstances.

Pensions therefore remain potentially valuable for retirement planning, but substantial salary-sacrifice users and employers may wish to review their arrangements before the change takes effect.

What the Budget may mean for investors

The OBR has upgraded its forecast for UK GDP growth in 2026 to 1.2%, but expects growth to slow to 1.0% in 2027 as higher energy prices and interest rates weigh on households and businesses. It then forecasts growth of 1.6% in 2028, 1.8% in 2029, 1.7% in 2030 and 1.6% in 2031.

CPI inflation is forecast to average 3.4% in 2027, peaking at 3.8% in the first quarter, before returning to the 2% target in the third quarter of 2028.

These are forecasts, not certainties. Energy prices, monetary policy, geopolitical developments and consumer behaviour may evolve differently.

Higher inflation and interest-rate expectations can create short-term pressure for bond prices, particularly for longer-dated bonds. Higher starting yields may, however, improve the prospective income available from some fixed-income assets. Credit quality, duration and liquidity remain important.

For equities, slower UK growth does not necessarily translate directly into weaker portfolio returns. Many UK-listed companies earn substantial revenues overseas, and diversified portfolios commonly hold assets across regions and currencies.

The Budget and OBR outlook provide useful context, but not a reliable signal for short-term market timing. Strategic asset allocation, diversification, liquidity and alignment with long-term objectives remain more controllable than the next movement in markets.

Post Budget financial planning

Following the Budget, useful planning discussions may include:

• Cash held outside ISAs and the potential effect of higher savings tax rates
• Use of ISA allowances across a couple or family
• The balance between readily accessible cash and longer-term investments
• Retirement withdrawals across pensions, ISAs and taxable accounts
• Salary-sacrifice pension arrangements before April 2029
• Wills, pension nominations and estate-planning assumptions before April 2027
• The timing and structure of a possible business disposal
• Whether the portfolio remains diversified and suitable for its objectives.

A time to review, not react

Budget 2026 increases the value of reviewing how savings, pensions and investments are held. It also makes advance planning more important for business owners and families whose pension wealth may become subject to Inheritance Tax.

‘For investors, the economic outlook argues for perspective rather than prediction,’ says Paul Willans, Managing Director of AJB Wealth. ‘Inflation and interest rates may remain uncomfortable, but one Budget should not displace a strategy built around long-term objectives and an appropriate capacity for loss.’

If any of these changes could affect your savings, retirement plans, estate or business interests, AJB Wealth can help you understand what they mean in the context of your wider financial plan. Please book an exploratory meeting or call us on 01428 774 070.

Important: This article provides general information and is not a personal recommendation or investment, tax or legal advice. Tax and pension treatment depends on individual circumstances and can change. Specialist tax or legal advice may be required.

The value of investments and any income from them can fall as well as rise. You may get back less than the amount originally invested. Past performance is not a reliable indicator of future performance. Asset allocation and diversification can help manage risk, but cannot eliminate loss. Currency movements can increase or reduce returns and future spending power. No investment outcome is guaranteed.