What personal tax changes can we expect at the Budget?

Commenting ahead of the new Chancellor’s first Budget, Elsa Littlewood, private client services tax partner at BDO said:

Income tax

“Although the Prime Minister has previously floated the idea of increasing the income tax personal allowance, the costs of doing so are likely to mean the Chancellor looks to other measures to ease the cost of living.

“We would expect to see specific measures targeting young taxpayers, like cutting income tax or employee NIC for three years for those entering work for the first time.

“This would give a clear incentive to NEETS to enter the workforce and could incentivize employers to increase employment. This would also be seen as a pro-growth measure, although one which may not help to solve the UK’s perennial productivity puzzle. Perhaps the cost of this could be financed by imposing a new lower rate of NIC on those working beyond pension age as some have suggested.

“We would also urge the Government to take a number of steps to tackle anomalies and simplify the income tax system. One example is the cliff edge for those earners who pass the £100K income threshold, the point at which the personal allowance starts to be reduced and entitlement to free childcare is removed.

“This creates a perverse distortion whereby people entering or progressing into higher-salaried roles are penalised and can face an effective marginal tax rate of around 60%.

“Instead, the Government should widen the bands and taper the withdrawal of the personal allowance up to £150K, while encouraging salary sacrifice schemes and pension contributions. This would minimise the disincentives to career progression and contribute to economic growth and productivity. Over time, smoothing this cliff edge could also support higher earnings, a stronger labour market and a broader tax base.”
 

Wealth taxes

“While many in the Labour Party support the idea of a straightforward wealth tax, the experience from other international jurisdictions is that wealth tax regimes are difficult to implement. There is also a fear that a wealth tax would lead to the wealthy leaving the UK, even if this is coupled with an exit tax to disincentivise departures.

“More likely is an increase in capital gains tax rates. However, as the Treasury’s own economic modelling suggest that significant increases in the CGT rate would likely reduce overall revenues, we would expect any increase to be modest.”

Indeed, in a recent interview, the Chancellor noted that the UK has the lowest CGT of any European G7 nation. This suggests that he could push UK rates up to 20% for the basic rate and 26% for the higher rate without making the UK ‘uncompetitive’.

However, if the Chancellor wants to support economic growth, any CGT increase would preferably be accompanied by the introduction of a CGT reinvestment relief for serial entrepreneurs to encourage them to stay in the UK for the longer term and keep building new businesses.
 

Inheritance tax

“With the political pain of the IHT changes for farmers and business owners fresh in the memory – and with more controversy surrounding IHT on pensions coming into force from April 2027, you might think that the Government would want to steer clear of further reforms. Yet, the Prime Minister has said he is prepared to expend political capital to get a national care service up and running.

“As Baroness Casey’s independent commission on adult social care is not due to report until 2027, and the Prime Minister’s recent conference speech indicating that funding for a national care service will come in part from changes to the triple lock after the next election, any further tax moves are likely to be delayed until a future Budget.”
 

Pensions

“In the lead-up to the Budget, we are likely to see continued speculation around individuals’ pension tax-free cash entitlements. However, given the uproar caused by Rachel Reeves announcing a capping of pension salary sacrifice arrangements from 2029, we believe that any major changes to pensions at Budget 2026 are an outside chance.

“In our view, a reversal of the announced changes to salary sacrifice arrangement would be very welcome as it would help restore confidence in pensions saving at a time when we know that people aren’t putting enough away for their retirement.

“A better and simpler option for a chancellor looking to raise money from pensions would be to add a small percentage tax charge on to pension fund management fees. This could raise billions without requiring involvement of the taxpayer and minimal support from HMRC.”
 

Supporting entrepreneurship

“Entrepreneurship is critical to economic growth as it supports job creation, investment and innovation. However, all too often the tax system is seen by entrepreneurs as a constraint rather than an enabler.

“The Government has already announced changes to the Enterprise Investment Scheme (EIS) but we would like to see further reforms, notably by raising the annual cash subscription limit to a more realistic sum for individuals attracted to EIS.

“We would also like to see the introduction of a new Enterprise Investment Scheme for scale-ups as the current system can create a cliff edge between start-up and scale-up stages where companies risk losing investment as thresholds are passed. This would incentivise entrepreneurs and help companies to access growth capital at the point they need it most to expand.”

Further details on BDO’s predictions are available at www.bdo.co.uk.
 

ENDS

Note to editors

BDO LLP operates in 19 offices across the UK and Ireland, employing 8,500 people. It has revenues of £1.1bn.

It provides Audit, Tax, Deals, and Consulting, Risk & Outsourcing (CR&O) services predominantly to the entrepreneurial, ambitious and growing mid-sized businesses that are driving growth in the UK and Ireland economies.

BDO LLP is the UK and Ireland member firm of the BDO Global network.

BDO Global

The BDO international network provides business advisory services in 169 countries and territories, with 95,000 people working out of 870 offices worldwide. It has revenues of US$11bn.
 

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