UK Budget 2025: Tax thresholds frozen, ISA cap cut

Budget day is always full of numbers and noise. Today, Wednesday 26 November 2025, the headlines landed early after the Office for Budget Responsibility accidentally posted its forecast before the Chancellor stood up. Rachel Reeves then delivered the Autumn Budget, setting out changes that will affect your pay, travel, bills and savings. We break them down below, with plain‑English notes you can use in the classroom or at the dinner table.

First, income tax thresholds. The personal allowance (£12,570), the higher‑rate threshold (£50,270) and the additional‑rate threshold (£125,140) will now stay frozen until April 2031. That doesn’t change tax rates, but it does mean more of any pay rise gets taxed - a quiet effect you can teach as “fiscal drag”. Scotland sets different rates for earnings, but these freezes still matter UK‑wide for savings and dividend income. HM Treasury says this will be legislated in the Finance Bill 2025–26.

If you don’t pay income tax, you still pay tax when you spend. VAT rates were left unchanged in this Budget, so the standard rate remains 20%. It’s a useful reminder that indirect taxes can weigh heavily on lower incomes, even when income tax thresholds don’t move. The Budget document explicitly notes no rise to headline VAT.

Minimum wages rise again from April 2026. The National Living Wage for workers aged 21 and over moves to £12.71 an hour. The 18–20 rate increases to £10.85, and both the 16–17 rate and the apprentice rate go to £8. The apprentice rate applies if you’re under 19, or 19+ in your first year; after that, you’re entitled to your age‑related rate. Government accepted the Low Pay Commission’s advice in full.

Motoring and travel get a reshuffle. A new per‑mile charge for electric cars begins in April 2028: fully electric cars at about 3p per mile and plug‑in hybrids at 1.5p, with the detailed design out to consultation. The temporary 5p cut in fuel duty stays until the end of August 2026, then rates step back to March 2022 levels by March 2027, with the planned 2026–27 inflation rise cancelled. Regulated rail fares in England are frozen until March 2027 for the first time in 30 years, and the £3 single bus fare cap runs to March 2027.

Energy bills will fall next year for most households. Ministers will remove some policy costs from bills, cutting the average household’s bill by about £150, and scrap the Energy Company Obligation from April 2026. Campaigners have already warned this weakens home‑insulation support; the climate think‑tank E3G branded the move “ECO‑cide”. Use this as a class discussion: should long‑term energy savings be funded through bills or general taxation?

Housing sees a new annual charge at the very top end. From April 2028, owners of homes valued at £2m or more in England will pay a High Value Council Tax Surcharge. It is banded at £2,500 for £2.0–£2.5m properties, £3,500 for £2.5–£3.5m, £5,000 for £3.5–£5m, and £7,500 for £5m+. The Valuation Office will run a targeted valuation exercise to identify properties above £2m and re‑check every five years. Government estimates fewer than 1% of homes are in scope.

Savings rules change from 6 April 2027. For most people under 65, the annual cash ISA limit will be £12,000, within the unchanged £20,000 overall ISA allowance - so anything above £12,000 must go into investments if you want the tax break. Over‑65s keep the full £20,000 cash ISA allowance. The Treasury will consult in early 2026 on a simpler first‑home ISA to replace the Lifetime ISA in due course, and will make Help to Save permanent with wider eligibility from April 2028.

Income from assets will be taxed more. From April 2026, dividend tax rises by 2 percentage points at the basic and higher rates. From April 2027, tax on savings interest and on property income rises by 2 points across all bands, taking rates to 22%, 42% and 47%. HM Treasury says over 90% of taxpayers do not pay any savings tax, but this is a good moment to teach how allowances, thresholds and rates interact over time.

Support for families changes too. The government will remove the two‑child limit in Universal Credit and tax credits from April 2026. The Department for Work and Pensions and HM Treasury estimate around 450,000 children will be lifted out of poverty by the end of the Parliament, while the Office for Budget Responsibility puts the cost at roughly £3bn a year by 2029–30. This is a major welfare shift - ideal for classroom debate on fairness and funding.

Pensions and older incomes: from April 2029 a £2,000 cap will apply to the amount you can pay into a pension via salary sacrifice without paying National Insurance - you can contribute more, but the NICs saving stops above £2,000. The Treasury says most basic‑rate users of salary sacrifice won’t be affected. The state pension will rise by 4.8% in April 2026 under the triple lock, worth up to about £575 extra a year depending on entitlement.

How to study this well. Timeline each policy by start date, and label who it applies to (UK‑wide, or England only). Then ask: does it change a rate, a threshold or an allowance? Finally, compare the government’s stated aims with OBR and Low Pay Commission analysis to practise source checking.