The 2025 Budget has delivered one of the most significant tax shifts in over a decade — and it falls heavily on working households. While the government has kept income tax and National Insurance rates unchanged, it has quietly extended the freeze on thresholds until April 2031.

This stealth tax approach means millions of workers will face higher tax bills each year, despite earning the same in real terms. For responsible families who work, save and plan, this is one of the most impactful elements of the entire Budget.

The freeze on Income Tax and National Insurance thresholds — originally due to end in 2028 — has now been extended for a further three years, taking us all the way to 2031. This may sound like a technical adjustment, but in reality, it represents one of the largest tax rises on working families.

What does a threshold freeze actually mean?

When tax thresholds do not rise with inflation or wage growth, more of your income is gradually pushed into higher tax bands. This is known as fiscal drag, and it increases your tax bill year after year without the government needing to announce a tax rate rise.

How does this affects working households

• More people will start paying tax who previously earned below the personal allowance.

• Basic-rate taxpayers will slip into the higher-rate bracket faster, even with modest pay rises.

• Higher-rate taxpayers will move into additional-rate taxation earlier than before.

• Even inflation-linked pay rises result in higher tax, with no increase in real income.

In short, if your salary increases — even just enough to keep up with rising living costs — a larger portion of your income will be taxed.

Why this matters for clients

• Take-home pay will erode over time.

• Household budgets will feel tighter even when salaries rise.

• Long-term planning (pensions, savings, mortgage affordability) becomes more challenging.

• Dividends, interest and rental income may also push clients into higher bands more quickly.

By 2031, the cumulative impact of this freeze will be substantial — especially for middle-income earners.

Who is most affected?

• Public and Private sector professionals

• Skilled tradespeople and mid-level earners

• Business owners drawing salary + dividends

• Dual-income families

• Anyone receiving wage increases between now and 2031

The freeze is not targeted at higher earners — it is a broad tax rise that disproportionately impacts the middle.

What you can do about it

There are several planning strategies that can reduce the impact of fiscal drag, including:

• Tax-efficient pension contributions

• Adjusting salary/dividend structures

• Making full use of allowances (while they still exist)

• Reviewing investment wrappers

• Planning for changes in personal tax position

These strategies can help offset the growing tax pressure caused by the threshold freeze.

Example: Emma — Working Professional close to the higher tax rate band.

Salary: £51,000 from April 2028
Tax thresholds: frozen until 2031

Before the Budget (if thresholds rose with inflation):

Emma’s pay rise would keep her comfortably in the basic rate, with only a slight tax increase.

After the Budget (thresholds frozen):

Because the thresholds don’t rise, Emma is pushed closer to the higher-rate band.

• Additional higher rate tax paid due to freeze in 2028: ~£292

• Additional higher rate tax paid due to freeze in 2029 with a 2% pay increase: ~£700
• Additional higher rate tax paid due to freeze in 2030 with a 2% pay increase: ~£1,116
• Emma earns more but feels poorer because each rise in income results in more tax, not more spending power.

Dividend income is set to become noticeably more expensive for:

• Small business owners drawing dividends

• Investors with diversified portfolios

• Anyone using dividends as part of retirement income

Key changes include:

• Higher dividend tax rates, especially in the higher-rate band

• A lower tax-free dividend allowance, reducing the amount that can be received tax-free

• More dividends are ,being taxed at higher rates because of frozen thresholds

This creates a double impact: you lose part of your allowance and more income is pulled into higher bands.

Example: Tom — Small Business Owner (Ltd Company)

Tom takes a mix of salary + dividends.
Annual dividends: £20,000

Before the Budget:

• Dividend allowance: £500

• Tax on remaining £19,500 at basic rate: 8.75%

After the Budget: Tax Year Starting April 2026

• Dividend allowance: £500

• Higher basic-rate dividend tax: 10.75% 

Tax impact:

• Previous tax bill: £1,706

• New tax bill: £2,096

• Extra tax: £390 per year (only taking dividends into account)

Combined with frozen thresholds, more of Tom’s income could be pushed into the higher-rate dividend band, further increasing the total tax burden.

Over several years, this becomes a meaningful drag on profits.

Savers face increased tax pressure through:

• A reduced Personal Savings Allowance in real terms

• More interest is being pulled into the taxable income bands

• The reduction of the Cash ISA allowance from £20,000 to £12,000 for under-65s (from April 2027)

For clients who have spent years building cash reserves, emergency funds, or savings for future planning, these changes mean:

• More tax payable on interest

• Less tax-free shelter for savings

• The need to rethink how savings are structured

This particularly affects cautious savers and clients aiming to maintain liquidity.

Example: Sarah — Prudent Saver with an Annual Salary of £49,000.

Cash savings: £60,000
Interest rate: 4%
Annual interest: £2,400

Before the Budget:

• Personal Savings Allowance (PSA): £1,000 (basic-rate taxpayer)

• Taxable interest: £1,400

• Tax payable: £280

After the Budget + threshold freeze:

Due to fiscal drag, Sarah is pulled into the higher tax bracket by 2027.

• PSA for higher-rate taxpayers: £500

• Taxable interest: £1,900

• Tax payable at 42%: £798

Extra tax paid due to the Budget:

£518 MORE per year — despite doing the right thing by saving.

Landlords and property investors face a tightening tax environment:

• Higher income tax on rental income

• Reduced allowances and reliefs on property-related expenses

• Less favourable capital gains rules, meaning higher tax on the eventual sale of investment properties

These changes significantly reduce the net returns on rental portfolios, affecting both retirement planning and long-term wealth strategies. Even accidental landlords — such as those who kept a former home to rent out — may feel the strain.

For clients relying on property as part of a diversified financial plan, a review is now crucial.

Example: Linda — Accidental Landlord, but a basic rate taxpayer with an annual salary of £40,000.

Linda rents out her previous home.

Rental income: £10,800 per year (£900/month)
Allowable expenses: £2,800
Taxable profit: £8,000

Before the Budget:

Linda pays basic rate (20%) = £1,600 tax

After the Budget: In April 2027, Linda’s basic salary is now £43,270.

Due to frozen thresholds, rental income could push Linda into higher-rate territory:

• A higher rate of (42%) applies to part of her rental income.

• A basic rate of (22%) applies to part of her rental income.

• She could also lose some property-related reliefs.

New tax bill: approx. £1,540 (basic) + £420 (higher) = £1,960

Extra tax:

£360 per year — a 22.5% increase that could be passed on to the tenant.

The 2025 Budget represents one of the most far-reaching tax shifts in recent memory — and the pressure falls squarely on working, saving and investing households. Frozen tax thresholds, rising dividend and savings taxes, and a tougher environment for property owners all combine to increase the burden on those who take financial responsibility for their future.

This makes proactive financial planning not just beneficial, but essential.