“The UK faces a challenging economic mix: elevated interest rates, high public debt ratios, and persistent budget deficits. Although the headline rate of income tax did not go up as expected, a range of tax changes will likely have a significant impact on those in retirement.”
Key UK Budget Announcements:
Tax rises: £26bn by 2029-30, offsetting £11.3bn in extra spending.
Tax burden: To hit 38% of gross domestic product (GDP) by the end of parliament, the highest since the Second World War, and up from 35% of GDP in 2024-25.
State Pension: Will increase in line with earnings growth by 4.8% from April 2026.
Tax-raising measures: The largest revenue-raising measures included:
– Extending the freezing of income tax and National Insurance Contributions allowances and thresholds from 2027/28 to 2030/31.
– A 2-percentage point increase on taxes on dividends, property, and savings income.
– Changes to how much can be saved in pensions via a system known as salary sacrifice.
Key Measures Relevant to UK Pensioners.
As last year, there was a lot of speculation on what the government would do with pensions in the Budget. These included concerns that tax-free cash entitlements might be reduced or the system of tax-relief might be overhauled. Again, these changes didn’t materialise, but the Chancellor did introduce some measures that will likely increase taxes for those in retirement.
Increase in income tax on savings and investment income.
Income from pensions, savings, investments, and property are subject to income tax but not to National Insurance. It had been suggested that the Chancellor would raise income tax rates across the board while perhaps cutting National Insurance. This would have raised the tax-take and changed the balance of tax raised between earned income and income from other sources. In practice, she didn’t go quite that far but has sought to address the perceived imbalance by raising income tax rates on savings and investment income.
Taxes on dividends will rise by 2% from April 2026 for basic and higher-rate taxpayers. The basic rate will increase to 10.75% from 8.75% and the higher rate will move to 35.75% from 33.75%. The additional rate remains at 39.25%.
Increases to income tax on interest income, such as that earned on cash deposits, will come in a bit later, in April 2027. Interest income will now be taxed at a basic rate of 22%, a higher rate of 42%, and an additional rate of 47%.
Property income will get its own income tax rates, like dividend and interest income, and will be set at the increased rates of 22%, 42%, and 47% from April 2027.
Existing dividend and savings allowances remain in place for now. The Personal Allowance will be used against income from pensions or employment first, making it more likely unearned income will be taxed at these higher rates.
Tax-free allowances are frozen for longer.
The £12,570 tax-free Personal Allowance was frozen by the last government for four years in 2021, and for a further two years in 2022. The Allowance will now be frozen for a further three years until the tax year 2030/31, drawing more people into tax for the first time. Similarly, the higher-rate threshold and additional rate threshold will be maintained at their current levels meaning a higher proportion of income will be taxed at these rates as incomes grow. With price inflation still at relatively high levels, wages and pensions will likely also grow strongly bringing more tax into the Exchequer.
State Pension increases.
The government has previously committed to maintaining the triple lock – the system whereby State Pensions increase at the greater of inflation, wage growth or 2.5% each year – until the end of the current Parliament. The Chancellor confirmed that State Pensions will this year be uprated in line with earnings growth of 4.8% from April 2026.
This means that those on the full new State Pension will see their income grow from £11,973 to £12,547 a year. With the freezing of the Personal Allowance at £12,570 until April 2031, the State Pension will soon be above the Personal Allowance for the first time. As the State Pension is taxable, this could have meant that hundreds of thousands of pensioners would have been brought into paying tax for the first time. However, the Chancellor promised after the Budget that those living solely on the State Pension and not receiving other income would not pay tax on their pension during this parliament.
The bottom line:
The increase in State Pensions will no doubt be welcome but, for some, the higher rates on savings and investments and the continued freeze on thresholds may more than offset this.
Other key considerations.
If you’re under 65, contributions are now limited to £12k a year in cash ISAs, while the rest of the £20k allowance must be invested into non-cash assets such as investment funds. If you’re over 65, the full £20k cash ISA allowance remains unchanged.
If you own a farm or business…
You still pay 0% on the first £1 million per individual (now fully transferable between spouses so £2 million per couple), anything above that cap will be taxed at 20%. Previously, there was 100% relief (0% tax) with no limit, so the change is forcing many families to restructure and sell land before the new IHT rules start on 6 April 2026.
If you die with unused pensions…
The government announced in the last Budget that any unused pensions on death would be subject to inheritance tax for deaths on or after 6 April 2027. The policy is still expected to go ahead as planned and could have a profound impact on how pensions are used in retirement.
2956250 Exp 31 August 2026
