Rachel Reeves’ Budget has tightened the screws on some families but rising house prices, inflation, council tax and salary rises will also account for a larger share of our cash going to HM Treasury in 2025.
Some might have to pay an extra £21,071 in tax next year, Sarah Coles, head of personal finance, Hargreaves Lansdown, revealed.
This figure assumes you are buying a house next year and inheriting some cash, for most Brits it’s more likely to be around £2,021 if you have savings or are expecting your salary to keep up with inflation.
So what taxes will you pay in 2025?
More tax on pay
Because income tax and National Insurance thresholds are frozen until 2028, and between now and then every pay rise will mean you pay more tax and creep ever closer to crossing a tax threshold.
“It means some people will be pushed over the personal allowance and be forced to pay income tax and National Insurance for the first time, while others find themselves facing higher or additional rate tax,” Ms Coles said. “At that point, it’s not just more income tax you have to worry about, but potentially higher rates on everything from dividend tax to capital gains tax, and a shrinking personal savings allowance.”
More tax on investments: it’s the first full year of the capital gains tax hike for stocks and shares
The rise in the capital gains tax rate for stocks and shares investors – from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher and additional rate taxpayers – kicked in the day after the Budget, on October 31. Ms Coles said this rise will make itself felt in 2025.
“For those couples who manage their finances to ensure the lower earner pays any capital gains tax, it’s a particularly harsh blow, because the rate for these taxpayers has risen more than for higher earners.”
Buying property
The rate at which you pay stamp duty rose from £125,000 to £250,000 in 2022 and the threshold for first-time buyers was also increased from £300,000 to £425,000.
Any increase in stamp duty is also down to the previous chancellor Jeremy Hunt as when took over at the Treasury, he announced that this tax break would become a temporary stamp duty holiday, and come to an end at the end of March 2025.
Ms Coles warns: “The end of the tax break is likely to prompt a rush in the first few months of the year, as people try to get purchases sorted ahead of the change. There’s a risk this will push up prices in the short-term, so while you could pay tax on less of the purchase price, you could end up paying more for the property in return. Once the holiday comes to an end, it could mean a lull in the market, which might mean more buyers having to cut their prices in order to shift their property. Meanwhile, for buyers, it’s going to mean an unwelcome rise in their tax bill when they’re already wrestling with the endless costs of buying a home.
More inheritance tax
The inheritance tax nil rate band will remain at £325,000 and the residence nil rate band at £175,000 in the next tax year. In fact, thanks to the Budget, it will stay at this level until 2030. Meanwhile, the IHT annual gift allowance is spending its fourth decade at £3,000. It means more estates will have more inheritance tax (IHT) to pay.
Ms Coles said: “IHT used to be seen as a wealthy person’s tax, but a mix of booming house prices and threshold freezes mean this may not be the case for much longer. It means we’re spending much more in tax – and are likely to continue to do so.”
More council tax: bills will rise up to 4.99%
Council tax will rise again in April. “Councils will have the right to raise bills by 4.99 per cent – without holding a referendum,” Ms Coles explained.
“Given that so many local governments have been struggling to make ends meet, it’s likely that an awful lot of them will opt for the biggest possible increase.”
More sin taxes: the end of the alcohol duty freeze hits – and cigarette taxes will rise
Alcohol duty reaches the end of the freeze in February, and while draught drinks in pubs and bars have been protected, the price of other tipples will increase. Cigarette prices rose after the Budget and are likely to do so again in the autumn of 2025.
5 ways to cut tax in 2025
- ISAs
You can save up to £20,000 in this tax year – completely free of tax and a stocks and shares ISA will protect you from higher capital gains tax, while a cash ISA will protect you from income tax.
Ms Coles is urging those looking to get on the property ladder to look at a Lifetime ISA. “If you’re saving to buy a first property, are aged 18-39, and have at least a year until you expect to buy, you should consider a LISA, because in addition to tax free growth, you get a 25 per cent bonus on contributions,” she said. “You can save or invest £4,000 this tax year.
“Don’t forget Junior ISAs as in the current tax year, you can save or invest £9,000 in a JISA for any qualifying child, and all interest, dividends or capital gains are tax free.
Pensions
You can pay up to £60,000 into a pension in the current tax year, so long as your salary is £60,000 or more. Contributions to pensions attract tax relief at your highest marginal rate, and the first 25% taken from the pension is usually tax-free. There’s tax relief on pensions, including SIPPS, even for non-taxpayers – on the first £3,600 a year. It means you can contribute tax-efficiently to a pension on behalf of a child or a non-working partner. If you can afford to put more money away for the long term, it’s a great way to cut your tax bill – as well as securing the income you need in retirement.
Salary sacrifice
In some cases, the government will let you give up a portion of your salary, and spend it on certain things free of tax (and in some cases National Insurance). This includes pensions, childcare vouchers, bike-to-work schemes, and technology schemes. Where employers offer to put their NI saving into the scheme, the hike in employers’ NI will make this an even more attractive option. It won’t boost your take-home pay, but will cut your tax bill, and make your money go further, so it’s worth checking with your employer whether they offer this.
Spouse exemptions
If you’ve already used your ISA allowance and you have assets that produce an income – like shares paying dividends or a property – married people should think about how they hold them. They can be passed between spouses (or civil partners) without triggering a tax bill. They can therefore be shared between a couple, so that both take advantage of their ISA allowances, and can both take an income up to the threshold. The balance can be held by the spouse paying the lower rate of tax, to reduce the tax payable.
Marriage allowance
“If one spouse is a non-taxpayer and the other is a basic rate taxpayer, the marriage allowance lets the non-taxpayer give £1,260 of their personal allowance to their spouse in the current tax year.”
