6 Hidden Budget Tax Traps — and 4 Strategies to Avoid Them
4 Ways to Reduce Your Tax Burden After the Budget
The latest Budget introduced a series of changes, including frozen thresholds, changes to pensions, and rising savings and dividend taxes. While the headlines may not have looked dramatic, the impact on your long-term finances could be significant.
Six Key Tax Changes That Could Affect You:
1. Income Tax Thresholds Frozen Until 2031
Originally frozen in 2021, Income Tax thresholds will now remain fixed for ten years. This prolonged freeze creates fiscal drag, as wages rise but tax bands do not, more people are pulled into higher-rate tax brackets each year.
Middle and higher-rate earners are hit hardest, but almost everyone will pay more tax over time.
2. Major Changes to Inheritance Tax (IHT)
From 6 April 2027, pensions will become subject to IHT for the first time. Beneficiaries may also face income tax if the individual dies over the age of 75.
Meanwhile, key thresholds remain frozen until 2031:
The £325,000 nil-rate band has been unchanged since 2009.
The Residence Nil Rate Band (RNRB) remains at £175,000.
Had these allowances risen with inflation, families would have benefited from an estimated extra £616,000 in combined allowances, equivalent to £246,000 less tax payable.
More estates will be affected:
HMRC collected £8.2 billion in IHT in 2024/25.
This is expected to rise to £14.5 billion by 2031.
The number of estates paying IHT is expected to double by 2030, at nearly 10%.
IHT is no longer a tax on the very wealthy. Rising property values and frozen thresholds mean many middle-class families are increasingly at risk.
3. Cash ISA Restrictions from 2027
With around £300–£400 billion currently sitting in Cash ISAs, the upcoming changes are significant:
Cash contributions will be capped at £12,000 per year for under-65s.
Stocks & Shares ISA limits remain at £20,000.
Transfers from Stocks & Shares ISAs into Cash ISAs may be banned.
Interest earned on cash inside a Stocks & Shares ISA may become taxable.
Combined with falling interest rates and inflation remaining higher for longer, large cash holdings risk losing value in real terms.
4. Higher Taxes on Savings and Dividends
From April 2027:
Savings tax rates rise by 2%.
From April 2026:
Dividend tax rates rise by 2%.
This affects:
Cash savers
Investors with unwrapped (no tax wrapper such as general investment accounts) portfolios
Business owners drawing dividends
Individuals holding single-company share positions outside tax shelters
Example: £200,000 in dividends would attract £60,280 in tax after these changes.
5. Pension Salary Sacrifice Changes (from 2029)
Salary sacrifice is currently one of the most powerful and widely used tax-planning tools, and how most work pension contributions are paid.
But from 2029:
National Insurance (NI) relief will be capped at £2,000 per year.
This means:
Middle and higher earners will see less going into their pensions.
Business owners will face higher employment costs.
A £60,000 pension contribution could cost around £13,000 more in NI, depending on earnings.
6. Venture Capital Trust (VCT) Tax Relief Reductions
From April 2026, income tax relief on VCTs will fall from 30% to 20%.
This means:
A £200,000 investment today receives £60,000 in income tax relief.
After April 2026, it will provide only £40,000.
Investors lose £20,000 of tax relief overnight.
VCTs are not always open for investment and have fund raises, closing for investment once reached. With the upcoming changes in the next few months, they are expected to fill capacity very quickly.
Please note VCTs are high-risk and are not suitable for everyone.
The good news? There are practical steps you can take now to protect your wealth.
Four Actionable Solutions:
1. Maximise Pension Contributions
Pensions remain one of the most powerful tax-efficient tools available.
Why act now?
Income tax relief is still generous, equivalent to 60% for some
You can potentially contribute up to £60,000 per year plus unused allowances from the past three years
Salary sacrifice remains highly effective until 2029, when National Insurance savings will be capped
Business owners can reduce corporation tax through employer contributions
2. Use Business Relief to Reduce Inheritance Tax
With IHT thresholds frozen until 2031, and pensions becoming taxable from 2027, more estates will be caught in the net.
Business Relief (BR) offers a powerful solution:
100% IHT relief after just two years, with some options offering full protection from day one
You retain ownership and access to your capital
Each person has £1 million of BR allowance and couples can potentially plan for up to £4 million using trusts
3. Review Your Cash ISAs and Cash Holdings
From 2027, Cash ISA allowances will be capped at £12,000 for under 65s, while inflation is expected to remain higher than cash interest rates.
What to do now:
Review your Cash ISA
Assess how much cash you actually need
Consider investing to help your long-term savings keep up with inflation
4. Consider VCTs Before Tax Relief Reduces
Venture Capital Trusts (VCTs) currently offer:
30% income tax relief
Tax-free dividends
No capital gains tax
From 6 April 2026, the income tax relief will drop to 20%, a £20,000 loss on a £200,000 investment.
If suitable, acting sooner could secure today’s more generous reliefs.
Final Thoughts
The upcoming tax changes will increase the burden on many households, but early planning can make a significant difference.
Your four key solutions:
Maximise pension contributions before the changes
Use Business Relief for IHT planning
Review Cash ISAs and excess savings
Consider VCTs before rules change
For personalised guidance, speak with a financial planner who can tailor these strategies to your circumstances.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.