The Office for Budget Responsibility (OBR) sets out its medium-term forecasts for the UK. This determines the fiscal headroom against the government’s borrowing rules. The important OBR forecast adjustments since March are:
Netting these out, the combination of revenue lost, and higher spending led to a shortfall against the governments binding fiscal rule to balance the current budget by 2029-30.
Back to topIn response to the OBR forecasts, tax hikes amounting to an expected c. £26bn have been announced.
Notably, Chancellor Reeves has chosen to increase the fiscal headroom to c. £22bn (up from £9.9bn in March). This has come from a higher number of smaller tax hikes, rather than one of the initial ideas which floated a 2p hike in income tax offset with a 2p cut in NICs for average earners.
What will be important for gilt yields in the short term is the split in total expected new revenues between revenues that are raised immediately and revenues that are backloaded. With the former more comforting to gilt investors on a combination of fiscal sustainability grounds, a lower-level of 2026 gilt issuance, and a higher fiscal drag on UK growth. Nevertheless, we expect any short-term impact on gilt yields from the budget to be range-bound and moderate, rather than large. Additionally, on balance, we expect these tax and other recently announced policy measures to help lower UK inflation in 2026, which would support Bank of England policy rate cuts in December and 2026.
Back to topGilt yields typically move incrementally higher or lower, over the seven or so trading days after the budget speech. This reflects the market gradually digesting and pricing-in the full details of the budget. The mini budget in September 2022 was the outlier in terms of both size and speed of gilt moves. Separately, several of the major policy decisions were flagged in the media in advance of today and we expect that these had largely already been priced-in to markets.
Back to topThe Chancellor announced that, from 1 January 2027, compensation and assistance paid by the PPF and FAS respectively will include CPI-linked increases (capped at 2.5% per year) on pre-1997 pension accruals. This will apply only where the former scheme provided indexation on these benefits.
Back to topAt the beginning of August, the Government published the Low Pay Commission’s estimates of the National Living Wage (NLW) from April 2026. The Budget confirmed the NLW would rise in line with the Commission’s central recommendation, increasing from £12.21/hour to £12.71 from 1 April 2026.
The automatic enrolment earnings trigger for 2026/27 has not yet been confirmed, but it has been frozen at £10,000 since 2014. If that continues, an employee paid the minimum wage would need to work just over 15 hours per week (15.1) to be eligible for automatic enrolment. That compares with just under 16 hours (15.7) now and is half the number of hours needed for eligibility at the start of the 2014 tax year (30.4).
Back to topThe Budget confirmed that, as expected, the Basic State Pension and New State Pension will rise by 4.8% from 6 April 2026:
These increases reflect the earnings growth number used in the Triple Lock, which delivers an uplift equivalent to the highest of earnings growth (4.8%), CPI inflation (3.8%) and 2.5%.
Under the triple lock, the new full State Pension (£12,547.60 p.a) will exceed the (frozen) personal allowance of £12,570 from April 2027. The Budget notes that the Government “will ease the administrative burden for pensioners whose sole income is the basic or new State Pension … so that they do not have to pay small amounts of tax via Simple Assessment from 2027-28 if the new or basic State Pension exceeds the Personal Allowance from that point. The government is exploring the best way to achieve this and will set out more detail next year”.
Back to topToday’s Budget confirms the Government’s intention to raise £2 billion through asset disposals, which will mean that the Atomic Weapons Establishment Pension Scheme and the Nuclear Liabilities Fund will no longer be pre-funded.
For the Atomic Weapons Establishment Pension Scheme, this follows a feasibility study announced by HM Treasury and the MOD in 2022, when the Government agreed to underwrite the scheme via a “Crown Guarantee.” However, this approach mirrors previous Government actions, such as the transfer of the Bradford & Bingley and Northern Rock schemes, and notably the £28 billion transfer of the Royal Mail Pension Scheme into Government control in 2012.
The Budget also announced a Strategic Asset Review, due to report before the next spending review. Its remit is to identify “opportunities to monetise assets and remove barriers to disposals”. While broader than pensions, this review may signal future transfers of assets and liabilities into central government for other schemes that currently benefit from a Crown Guarantee.
Back to topAlongside the main Budget proposals, the Government has shown how keen it is to quickly facilitate new types of Collective Defined Contribution (CDC) pension schemes, in particular “Retirement CDC” which will enable DC savers to purchase a cost-effective income for life once these schemes are enabled, due in 2028. Given that a previous cause of delay to launching CDC schemes was the overhaul of tax laws, the Government will create new powers under the Finance Bill that will allow HMRC to create tax laws more quickly for new types of CDC schemes.
Back to topAs well-trailed in the press, the headline change for pension schemes was a cap of £2,000 on salary sacrificed pension contributions eligible for NIC relief. This measure will, however, apply only from 2029-30.
DWP analysis published in July 2025 found that the median contribution rate to private sector employees in DC schemes was broadly 4%. A 4% contribution of £50,000 is £2,000, so the median contributor with earnings up to the upper earnings limit (£50,270) will be unaffected – and similarly nor will be their employers. However, the cap will bite where members sacrifice larger amounts – often encouraged by matching contributions by their employer. This article spells out the impact where pension contributions are paid at 5%. The additional cost will mostly fall on the employer with NI at 15% compared to 2% (or 8%) for the employee – though this will be mitigated for the employer if it shared some or all of its NI savings (conversely, employees will pay more NI and lose previously passed-on savings).The cost of amending payroll systems to administer the NI cap is also likely to be passed on to employers one way or another.
A basic-rate taxpayer will receive 85p from £1 of pension savings (25p tax free cash, plus 75p taxed at 20%, which is 60p). Assuming the pension saving was made while a basic-rate taxpayer, that £1 of savings will have cost 72p using salary sacrifice (£1 less 20% tax and 8% NICs). Turning 72p into 85p represents an 18% uplift. Losing the 8% NI savings turns 80p into 85p which is only a 6¼% uplift. So the incentive is cut by 2/3. By contrast, a higher earner (albeit earning less than £100,000) who expects to be paying basic rate tax in retirement was turning 58p into 85p, and that will now drop to 60p to 85p, so 46.6% uplift cut to 41.7%. So a small reduction in incentives for the higher earners and a big reduction for median earners.
Lower paid individuals are unable to participate in salary sacrifice schemes if it would bring their pay below the national minimum wage (£12.71 in 2026-27 for those aged 21 and over). The ONS recorded the average weekly hours of work for full-time workers as 36.5 hours. So for 2026-27 that is equivalent to over £24,000 per annum. Further, under a salary sacrifice scheme, pre-sacrifice pay is typically used for certain benefits, for example a multiple of salary paid on death in service, and mortgage providers can also be willing to base loans on pre-sacrifice pay. It may therefore not be straightforward to replicate the tax advantages of a salary sacrifice scheme by moving to lower pay and a pension scheme with no employee contribution – not to mention the dual challenges of communicating the changes and protecting against any anti-avoidance measures eg HMRC’s Optional Remuneration Arrangement rules.
Back to topIn May 2025, the Government set out proposals to facilitate access to surpluses in defined benefit (DB) schemes. It noted that it would not mandate how extracted surplus is used, but that “the potential for members to benefit” is “vital to the success of this policy”. The Budget confirms that, from April 2027, it intends to allow well-funded DB pension schemes to pay surplus funds directly to scheme members over the normal minimum pension age (where scheme rules and trustees permit this). Currently, such a payment (from a DB arrangement) would be likely to be an unauthorised payment attracting penal tax charges.
Back to topThe Budget document confirms the intention to impose inheritance tax on certain pension death benefits for deaths from 6 April 2027. In a change to the proposals consulted on in July 2025, Personal Representatives (PRs) will be able to direct Pension Scheme Administrators (PSAs) to withhold 50% of taxable benefits for up to 15 months. PRs will also be able to direct PSAs to pay Inheritance Tax due in certain circumstances – the earlier proposals only gave beneficiaries this option. Recognising that members often lose track of their pensions – and it is even harder for PRs to trace them – PRs will be discharged from a liability for payment of Inheritance Tax on pensions that are discovered after the PRs have received clearance from HMRC.
Beyond the above, there is little detail in the ‘red book’ and the supporting HMRC paper had not been published at the time of writing. We urgently need final legislation with administrators requesting at least 12 months’ notice to implement these changes. Most of this is expected to be included in the Finance Bill, but this can only start its passage through Parliament once debate on the Budget has concluded – expected to be Tuesday 2 December. However, we also need to see the regulations covering communications between PSAs, PRs and beneficiaries – these have not yet even been circulated in draft.
Back to topThe personal allowance and the higher rate thresholds for income tax have been frozen since April 2021 and had not been due to increase until April 2028. The Chancellor announced that this freeze will be extended for a further three years, until April 2031. The levels of income at which most people start to pay income tax (£12,570) or higher-rate income tax (£50,270) will therefore have remained unchanged for ten years. In last year’s (Autumn 2024) Budget, the Chancellor stated that an extension of the freeze would “hurt working people” and “take more money out of their payslips”.
Back to topThe personal allowance (the amount on which no income tax is payable, £12,570) is reduced by £1 for every £2 of a person’s taxable earnings over £100,000. This measure was introduced from the 2010/11 tax year and the threshold from which it applies has remained unchanged (despite earnings over that same period having increased by around 65%). Once income reaches £125,140, the personal allowance is completely extinguished (£100,000 + (£12,570 x 2)) and that is the point from which the additional rate of income tax (45%) becomes payable.
Although the tax rate on income within the taper range is 40%, for each £2 impacted the individual is also being taxed at 40% on £1 that was previously tax free. The effect of this is a 60% marginal tax rate charge. (In Scotland there is an effective rate of 67.5% over the same income band).
There is no change to the point at which the personal allowance taper kicks in (£100,000) the rate of the taper (£1 for each £2 of excess), or the threshold from which the 45% additional rate (£125,140) applies.
Note also that there are cliff-edge effects for parents earning over £100,000 because of the loss of tax-free childcare and “free hours” childcare subsidies, Additional pension saving is often very financially attractive in these circumstances.
Back to topThere are no changes to income tax rates for earnings and pensions. However, income from dividends will be taxed at 2% more from 2026-27 (with the exception of dividends subject to the additional rate), and income from property and savings will be taxed at 2% more from 2027-28. The rationale stated is to narrow the gap between income earned which is subject to NI and other types of income.
The 2026-27 rates will, therefore, be 20% (basic), 40% (higher) and 45% (additional) for earnings, pensions, savings and property income and 10.75% (ordinary), 35.75% (upper) and 39.35% (additional, unchanged) for dividends.
For 2027-28 as above except that savings and property income will be taxed at 22% (basic), 42% (higher) and 47% (additional).
Back to topWhile the pensions tax limits apply throughout the UK, our commentaries on income tax and allowances apply to UK taxpayers in England and Northern Ireland.
The Scottish Parliament is responsible for its own income tax rates and thresholds and it is expected to announce those for 2026-27 in its Budget, scheduled for 13 January 2026. For 2025-26, Scottish income tax rates start at 19% and rise to 48%.
The Welsh Parliament can vary the rate of income tax, but not the thresholds. To date, it has always adopted the same rates as in England. and for 2025-26 no member voted against matching the English rates.
From 2027-28, the Scottish and Welsh Parliaments will be given new powers to set property income tax rates. Savings and dividend tax rates apply UK-wide.
Back to topThere were no changes announced to the headline National Insurance Contribution (NIC) rates for employers (15% on earnings over £5,000) or employees (8% on earnings between £12,570 and £50,270, and 2% on amounts above this).
These thresholds will be frozen until April 2031 (they were not due to increase until April 2028, anyway).
The Lower Earnings Limit (LEL) will increase in line with the September CPI (3.8%) from £6,500 to £6,708. However, the lower limit for automatic enrolment qualifying earnings limits no longer matches the LEL having been frozen at £6,240 since 2020-21. We expect that limit to be confirmed in early 2026.
Back to topAs was the case last year, there was much speculation in the run up to the Budget that the cap on retirement tax-free lump sums (or “pension commencement lump sums (PCLS)” as HMRC calls them) might be slashed. That did not materialise in 2024, and the maximum lump sum has emerged similarly unscathed from this year’s Budget. The cap takes the form of a “lump sum allowance” (LSA) and the standard LSA is being maintained at £268,275 (it is higher for individuals with certain protections). There is no automatic increase of the LSA and so, over time, its real value will erode.
Last year, anticipating a possible cut, many people who might ordinarily have left their pension savings untouched, accessed their lump sums before the Budget. Once it became clear that the cap was being left unchanged, some of those who had taken lump sums “unnecessarily” then sought to exercise cooling off rights and repay them into their pension. Cooling-off rights do not apply to occupational pensions and, in December 2024, HMRC issued Newsletter 165 stating its view that neither do they extend to PCLSs i.e. they cannot be returned and treated as never having been accessed. This autumn, HMRC sought to bolt the stable door before the horses ventured out, reiterating its view (Newsletters 173 and 174) on the non-availability of cooling-off rights for tax-free lump sums.
For more background on this see our 2024 Looking Ahead article Limiting tax-free cash from UK pensions.
Back to topAlong with cutting back the maximum tax-free lump sum, considerable pre-Budget speculation focused on the ending of marginal rate tax relief on pension contributions. The Pensions Minister, a key member of the Government’s Budget preparation team, had, before becoming an MP, advocated a flatter rate of tax relief and the Chancellor herself had previously advocated ending marginal-rate relief. However, any movement away from marginal-rate relief is hugely complex and would also have been highly likely to hit the pay packets of public sector higher-rate taxpayers (and also some basic-rate taxpayers towards the top of that earnings’ band). Politically, that might have been very difficult. Marginal rate tax-relief on pension contributions is being maintained.
For more background on this see our 2024 Looking Ahead article Ending marginal rate tax relief on UK pension contributions.
The primary controls within the pensions tax regime, and their levels, remain unchanged:
* Higher for individuals with certain protections.
The standard AA reduces by £1 for every £2 that an individual’s adjusted income (very broadly income plus pension contributions) is over £260,000. However, the taper applies only where the member has threshold income (income excluding most pension contributions) over £200,000. The taper ceases once the AA reaches £10,000 (i.e. once adjusted income reached £360,000).
The MPAA applies to money purchase saving once a member has accessed their pension saving “flexibly”, e.g. taking a drawdown income.
Back to topFrom 6 April 2027, the annual Cash ISA allowance will reduce from £20,000 to £12,000 each tax year for those under age 65. The overall ISA allowance will stay at £20,000 to encourage saving into Stocks & Shares ISAs. Over 65s will maintain a Cash ISA allowance of £20,000.
The reduction to cash ISA limits is designed to encourage investment into companies via shares, but this move will hit those wedded to cash savings as more of these savings become taxable.
The government will also publish a consultation in early 2026 on the implementation of a new, simpler ISA product to support first time buyers to buy a home. Once available, this new product will be offered in place of the Lifetime ISA.
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