London, November 28, 2025
The Chancellor’s Autumn Budget 2025 has frozen income tax and National Insurance (NI) thresholds until 2031, significantly affecting UK taxpayers by increasing the tax burden on rising salaries and reducing take-home pay over time. This policy shift will push many earners into higher tax brackets and diminish the benefits of salary sacrifice pension schemes.
Frozen Tax and NI Thresholds
The government’s decision to maintain current income tax and NI thresholds without adjustment for inflation or wage growth until 2031 will impose what is known as “fiscal drag.” As salaries increase with inflation or promotions, more income will be subject to higher tax rates because the thresholds that define tax brackets remain fixed. This effectively means that workers will face heavier taxation on their earnings even if their purchasing power does not truly increase.
Increasing Numbers in Higher Tax Brackets
Fiscal drag is expected to cause nearly 780,000 basic rate taxpayers to move into higher tax brackets by the 2029/30 tax year. This broadens the tax base but raises concerns about the impact on middle earners, who will see a reduced share of salary increases going into their pockets due to higher taxes.
Impact on Salary Sacrifice Pension Contributions
From April 2029, the tax efficiency of salary sacrifice pension schemes will be reduced. Contributions above £2,000 a year made through salary sacrifice will become subject to both employee and employer NI contributions—employees facing 8% or 2% and employers paying 15% on amounts exceeding the threshold. This change diminishes a common tax planning strategy used to boost pension savings while lowering immediate tax and NI liabilities.
Higher Taxes on Dividends, Savings, and Property Income
The Budget also introduces increases in taxes on investment income. From April 2026, dividend tax rates will rise, and from April 2027, additional 2% taxes will apply to savings and property income. These measures place further financial strain on investors, impacting those dependent on dividend income or rental property earnings.
Inheritance Tax Thresholds Frozen
Inheritance tax thresholds will also be frozen until 2031, which could lead to higher tax liabilities on estates as property values and other assets appreciate in nominal terms. This freeze indirectly affects wealth transfer and long-term financial planning for many families.
Fiscal Drag and Broader Policy Context
Fiscal drag is a revenue-raising mechanism that subtly increases tax take as incomes grow, without formally raising tax rates. In this case, the freeze on thresholds represents a deliberate policy to bolster government income in the face of ongoing budgetary pressures. Although it increases tax revenues, it also effectively reduces disposable income and may dampen incentives for salary growth.
The Chancellor’s measures reflect a cautious fiscal stance amid economic challenges, prioritizing revenue stability. However, the implications stretch beyond the public finances to affect household income, retirement savings, and investment returns, especially for middle-income earners.
As these policies take effect, workers, investors, and pension contributors should prepare for a landscape where nominal wage growth may not translate into increased net income or savings efficiency. Planning for these changes will be vital for business leaders, policymakers, and individuals navigating the evolving UK tax environment.