Rachel Reeves Tax: The Complete Guide to New UK Budget Policies

Rachel Reeves’ tax changes involve a significant restructuring of the UK fiscal landscape, primarily driven by the Autumn Budget 2024 and the subsequent 2025 updates aimed at raising over £40 billion to stabilize public finances. Key measures include an increase in Employer National Insurance contributions to 15%, a hike in Capital Gains Tax rates to a maximum of 24%, and the introduction of a new “mansion tax” surcharge for properties valued over £2 million. In this guide, you will learn about the specific timelines for these implementations, how they affect individual taxpayers and business owners, and the long-term outlook for inheritance and property taxes through 2030.

Employer National Insurance Increases

The most substantial revenue-raising measure introduced by Chancellor Rachel Reeves is the reform of Employer National Insurance Contributions (NICs). Starting in April 2025, the rate paid by employers rose from 13.8% to 15%, while the threshold at which these payments begin was lowered from £9,100 to £5,000. This shift is designed to generate roughly £25 billion annually to fund public services like the NHS.

Small businesses receive some protection through the doubling of the Employment Allowance to £10,500. This means that many micro-businesses will be shielded from the immediate impact of the rate hike, effectively allowing them to employ multiple staff members before paying any NICs at all. However, larger organizations are expected to absorb these costs, which may influence future wage growth and hiring strategies across the private sector.

Capital Gains Tax Reforms

Rachel Reeves has implemented a significant increase in Capital Gains Tax (CGT) to bring it closer in line with income tax rates. The lower rate of CGT increased from 10% to 18%, and the higher rate rose from 20% to 24% for most assets. These changes took effect immediately following the 2024 Autumn Budget to prevent a rush of asset disposals before the new tax year.

Specific rules for residential property remained at 18% and 24%, meaning the gap between “other assets” (like shares) and property has been eliminated. Business owners selling their companies also face higher rates under Business Asset Disposal Relief, which is set to rise gradually to 18% by April 2026. These measures are intended to ensure that those with significant capital wealth contribute more to the national treasury.

Inheritance Tax and Pensions

A landmark change in the Reeves tax plan is the inclusion of inherited pensions within the scope of Inheritance Tax (IHT). From April 2027, unused pension funds and death benefits will no longer be exempt from IHT, a move that targets “pension potting” where individuals use retirement accounts as a tax-free vehicle for passing on wealth. This is expected to affect around 8% of estates that were previously below the tax threshold.

Agricultural and Business Relief

Major reforms to Agricultural Property Relief (APR) and Business Property Relief (BPR) will begin in April 2026. While the first £1 million of combined agricultural and business assets will remain tax-free, any value above this threshold will be taxed at an effective rate of 20%. This change has sparked significant debate within the farming community regarding the future of family-owned estates and land transition.

The New “Mansion Tax” Surcharge

Formally known as the High Value Council Tax Surcharge, this new property tax targets homes in England valued at over £2 million. Announced in late 2025, the surcharge is expected to range from £2,500 to £7,500 per year, depending on the specific valuation band. Unlike standard council tax, these funds will go directly to the Treasury rather than local authorities.

The surcharge will be levied on property owners rather than occupiers, marking a shift in the traditional UK property tax model. While the valuations are based on 2026 market prices, the first payments are scheduled to be collected from April 2028. This measure is a key part of the government’s strategy to increase the tax take from high-value physical assets.

Income Tax Threshold Freeze

Rachel Reeves has confirmed that personal income tax thresholds will remain frozen until April 2028, with an extension for some elements through to 2031. By not raising the tax-free personal allowance (£12,570) in line with inflation, more workers are pushed into higher tax brackets as their nominal wages rise—a phenomenon known as “fiscal drag.”

This “stealth tax” is one of the most effective revenue generators for the Treasury because it does not require a formal increase in the headline tax rates. While the Chancellor promised not to raise the basic, higher, or additional rates of income tax, the threshold freeze ensures that the total tax burden as a percentage of GDP continues to rise to record levels.

Changes to Dividend Tax

Starting in April 2026, tax rates on dividend income will increase by two percentage points across the ordinary and upper rates. This means basic rate taxpayers will see their dividend tax rise from 8.75% to 10.75%, while higher rate taxpayers will pay 35.75%. These changes aim to raise approximately £5.2 billion over the next five years.

The tax-free dividend allowance remains at £500, having been significantly reduced by previous administrations. For investors holding stocks outside of tax-wrapped accounts like ISAs, these changes will notably reduce the net return on investment portfolios. It also increases the tax liability for small business owners who pay themselves primarily through dividends rather than a traditional salary.

Stamp Duty Land Tax Updates

While Rachel Reeves opted not to introduce a permanent “mansion tax” on transactions, she did not extend the temporary Stamp Duty thresholds introduced by the previous government. Consequently, in March 2025, the nil-rate threshold for home buyers returned to £250,000 (from £425,000 for first-time buyers). This has effectively increased the cost of moving for thousands of families.

The 2% surcharge on property income tax for landlords, set to begin in April 2027, further compounds the tax burden on the private rental sector. These combined measures are intended to cool the high-end property market while generating steady streams of revenue from both the purchase and the ongoing ownership of real estate.

Fuel and Vaping Duties

In a move to balance the “cost of living” with environmental goals, the 5p fuel duty cut has been extended until August 31, 2026. After this date, duty will increase gradually: 1p in September 2026, 2p in December 2026, and 2p in March 2027. This phased approach is designed to prevent a sudden inflationary shock at the petrol pumps.

Additionally, a new Vaping Products Duty will be introduced on October 1, 2026. This will be accompanied by a one-off increase in tobacco duty to maintain a financial incentive for people to choose vaping over smoking. These “sin taxes” are part of a broader public health strategy integrated into the Chancellor’s fiscal planning.

Practical Information and Planning

Navigating the transition into these new tax regimes requires careful timing and awareness of implementation dates. Many of the most impactful changes are staggered between 2025 and 2028.

• Key Dates: April 2025 (Employer NICs increase), April 2026 (Agricultural relief changes), October 2026 (Vaping duty starts), April 2027 (Pensions in IHT), April 2028 (Mansion tax first collection).
• Business Costs: Employers should budget for an extra 1.2% in National Insurance for salaries above the £5,000 threshold.
• Asset Disposal: If selling shares or second homes, ensure you calculate the new 18%/24% CGT rates into your net profit projections.
• ISA Management: Since dividend and savings income taxes are rising, utilizing the full £20,000 annual ISA allowance (including the £12,000 cash limit) is more critical than ever.
• Tips for Taxpayers: Review your will and pension nominations before 2027 to account for the new Inheritance Tax rules on retirement funds.

Frequently Asked Questions

When does the increase in Employer National Insurance start? 

The increase from 13.8% to 15% takes effect on April 6, 2025. Simultaneously, the threshold at which employers start paying NICs will drop from £9,100 to £5,000 per year.

Is there a new tax on houses worth over £2 million? 

Yes, the High Value Council Tax Surcharge (often called a mansion tax) applies to homes in England valued over £2 million. While valuations are happening now, the first payments are due in April 2028.

Will I have to pay Inheritance Tax on my pension? 

From April 2027, unused pension funds will be included in the value of your estate for Inheritance Tax purposes. Previously, most pensions could be passed on tax-free.

How much did the Capital Gains Tax go up? 

The lower rate increased from 10% to 18%, and the higher rate increased from 20% to 24%. These changes applied almost immediately after the October 2024 Budget.

What is the 2026 change for farmers? 

Starting in April 2026, Agricultural Property Relief is capped. The first £1 million of land and assets is exempt, but anything above that is subject to a 20% Inheritance Tax rate.

Are income tax rates going up? 

The headline rates (20%, 40%, 45%) are not increasing. However, because the tax-free thresholds are frozen until 2028, many people will pay more tax as their wages increase with inflation.

What is the “Fuel Finder” scheme? 

Introduced in early 2026, this mandatory scheme requires petrol stations to report price changes within 30 minutes to a central database. It aims to save drivers 1p to 6p per litre by increasing competition.

Is the dividend allowance changing? 

The tax-free allowance remains at £500, but the tax rates applied to dividends above that amount are increasing by 2% starting in April 2026.

Can I still use salary sacrifice for my pension? 

Yes, but from April 2029, the National Insurance relief on salary-sacrificed pension contributions will be capped at £2,000 per year. Contributions above this will incur NICs.

Will electric cars have to pay road tax? 

Yes, Vehicle Excise Duty (VED) for electric vehicles will rise in line with inflation from April 2026. Additionally, the luxury car supplement threshold for EVs is increasing to £50,000.

Final Thoughts

The fiscal strategy spearheaded by Rachel Reeves represents a fundamental shift in the UK’s economic model, moving toward a high-tax, high-investment framework intended to stimulate long-term growth. By raising the tax burden to an expected 38% of GDP by 2030, the government aims to generate the “fiscal headroom” necessary to insulate the economy against global shocks and underfunded infrastructure.

Critics and economic think tanks, however, warn of “fiscal fiction,” noting that while spending is front-loaded in 2025 and 2026, the subsequent years rely on implausibly tight spending constraints. The success of these tax changes will ultimately depend on whether the promised public sector improvements—particularly in the NHS and transport—can boost national productivity enough to offset the immediate drag of higher business costs and frozen personal allowances.

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