UK Budget 2025: tax freeze to 2031, £2k pension cap

Two lines from 26 November matter for your payslip. First, income tax thresholds are now frozen until April 2031. Second, from April 2029 only the first £2,000 a year of pension contributions made via salary sacrifice will escape National Insurance. The Office for Budget Responsibility (OBR) still expects living standards to rise only about 0.5% a year across this Parliament, a view the Institute for Fiscal Studies (IFS) described as “truly dismal”. We’ll explain what each move means in plain English, with examples you can use in class or at home.

When a government “freezes thresholds”, it keeps the tax bands at the same cash values even as wages and prices rise. That quietly pulls more of your pay into tax and nudges more people into higher bands. The Personal Allowance stays at £12,570 and the higher rate threshold at £50,270 until April 2031; without freezes, the Financial Times notes they would have been nearer £17,470 and £70,370 by 2030–31. This is often called fiscal drag.

Now the salary sacrifice change. Today, when you give up salary and your employer pays it into your pension, neither of you pays NI on that amount. From April 2029, that NI saving will be capped at £2,000 of sacrificed pay each year. Anything above that will attract NI for you and your employer. The policy is set out in the Budget documents and Treasury guidance.

A quick worked example helps. Say you sacrifice £5,000 into your pension. Today, there’s no NI on that £5,000. From 2029, only £2,000 would remain NI‑free. The other £3,000 would be charged at your NI rate (currently 8% for most earnings in the main band, 2% above the upper limit) and 15% for your employer. That’s roughly £240 in employee NI and £450 for the employer, assuming rates stay the same. It doesn’t change your income tax relief; it affects NI only.

So is this a tax rise on “working people”? Ministers point out they have not raised the headline rates of Income Tax, National Insurance or VAT. The Prime Minister told the BBC the manifesto commitments were kept, but “everybody” had been asked to make a contribution to protect the NHS, schools and to bear down on the cost of living. Critics, including the IFS’s Helen Miller, argue that freezing thresholds and limiting NI relief on pensions are tax rises in all but name.

What does the OBR say about your spending power? Its forecast points to average disposable income per person rising by about 0.5% a year over the next five years – around £100 a year in the near term – far below the 2%‑plus yearly gains the UK saw in the late 20th century. The IFS calls this outlook “truly dismal”, and the Resolution Foundation expects this Parliament to be the second‑worst for living standards on record.

Where does the money come from? Beyond the threshold freeze and the pension NI cap, the Budget raises more from wealth and unearned income: higher taxes on online gambling, increases to dividend and savings rates, and separate higher rates for rental (property) income from 2026–27. A high‑value property surcharge (“mansion tax”) will apply in England from April 2028 to homes valued at £2 million or more, collected alongside council tax.

There are cost‑of‑living measures too. NHS prescription charges in England are frozen at £9.90 next year, and regulated rail fares in England are frozen for a year from March 2026. The Treasury is also moving certain “green” and social levies off electricity bills and scrapping the ECO scheme, which it says will cut a typical bill by around £150 next year; the IFS notes the saving falls to roughly £39 from 2029–30. These steps help with bills but don’t change the long‑run growth picture.

What this means for a typical worker. The Resolution Foundation estimates the extended freezes will cost a typical employee about £220 in 2030–31 versus uprating the bands, with larger amounts for higher earners. In plain terms: if your pay rises with inflation but thresholds stay fixed, your total tax bill still creeps up. If you use salary sacrifice heavily, budget for NI on anything above £2,000 from April 2029.

What this means for employers and payroll leads. The NI cap shifts some cost onto high salary‑sacrifice arrangements. Employers will pay 15% NI on the sacrificed amount above £2,000 and may revisit how they structure contributions. Payroll teams should plan updates well before April 2029 and explain to staff that income tax relief is unchanged; it’s the NI treatment that alters.

The politics matters because it shapes expectations. The IFS says there was no “big fiscal repair job” required by the latest OBR numbers, yet the government chose a mix of higher later‑year taxes and near‑term spending that, in the IFS’s words, leaves growth still wanting. It also criticised the leak‑strewn run‑up to the Budget and urged a clearer focus on policies that lift productivity.

If you’re teaching this, focus on three checkpoints. First, rates versus thresholds: rates didn’t go up, thresholds did not move, which raises revenue through fiscal drag. Second, National Insurance versus income tax: the pension change caps NI relief, not tax relief. Third, claims versus forecasts: ministers say the package is fair and targeted; the OBR, IFS and Resolution Foundation warn that living standards will improve only slowly. Use real payslip examples so learners can see the arithmetic.