Nine ways to beat the Budget’s £26 billion tax hikes

The chancellor unveiled £26 billion of tax hikes in her most recent Budget, with much of it landing at the feet of savers, investors and workers. While there’s no doubt that tax increases are coming, there are clever ways to mitigate the impact of these tax changes. Making smart moves before some of the changes come in place, while also getting the most out of the tax breaks that remain, will put you on good financial footing to weather the storm.

So, here’s our nine-point plan to Budget proof your finances – as much as possible. And if you want more detail on all the Budget announcements, check out our article on how Budget changes might impact your money.

1. Don’t ditch salary sacrifice

The National Insurance perks of using salary sacrifice for pensions will be capped at £2,000 per year from April 2029. But whatever you do, don’t stop your pension contributions. Despite the National Insurance savings being limited, what you pay in will still be exempt from income tax and workers can still enjoy pension tax relief up to their marginal rate of income tax. What’s more, making pension contributions to schemes like SIPPs will still reduce your ‘adjusted net income’. This is important as it can pull you out of higher rate tax brackets or one of the many punishing tax traps while also boosting your retirement savings.

2. Beat the frozen allowances

The chancellor has frozen income tax bands for another three years, with the result tax bands will remain where they are until 2031. It means more people will be pushed into the next tax bracket if they get a pay rise and will see more of their income hit by tax than if these thresholds had been increased in line with inflation. What’s more, there are lots of tax traps that may catch you out if you move into a new tax bracket or over certain earnings levels.  

For example, someone with an adjusted net income of £60,000 or more will start to see any child benefit clawed back and someone breaching the £100,000 limit starts to lose their tax-free personal allowance for the year. In both cases, their extra earnings face an effective tax rate of 62% if you include National Insurance. Equally if you move into the next tax band, you could face higher tax rates on dividends, capital gains or your savings income.  

You can dodge these traps by contributing money into your pension, to bring your taxable income below the different thresholds. You just need to work out what extra contributions you need to make to reduce your ‘adjusted net income’. This will involve a little bit of extra admin but will still be well worth it when you consider the potential tax savings on offer.

3. Use the Lifetime ISA while you can

There are plenty of ways to claim free money from the government, and one of the best for some people is the Lifetime ISA. In the 2024/2025 tax year, about 960,000 people subscribed to a Lifetime ISA, according to the Office for National Statistics, showing how popular the accounts are. The government has announced plans to review it and offer a simpler product instead, but we won’t have more detail on that for a while.  

For now, those eligible for a Lifetime ISA can still open the account, pay in up to £4,000 each tax year and receive a 25% government bonus, adding up to £1,000 in free money per year. For anyone saving for their first home, the Lifetime ISA is pretty unbeatable with that 25% government bonus boosting your deposit savings. Equally, for those who are self-employed and so don’t have a workplace pension, a Lifetime ISA is a great way to save for retirement. While employed people would be better off maximising any matched company contributions on offer for their pension, self-employed people don’t have this option.

4. Protect your cash savings from tax  

Higher interest rates and frozen tax bands mean more savers are facing tax bills on their cash savings – the government estimates 2.64 million people are expected to be hit with tax on their savings in the current tax year. Now the government has also increased the rate of tax you pay on your savings from next April – by 2 percentage points. It takes the tax rates for cash savings to 22% for basic-rate taxpayers, 42% for higher rate payers and 47% for additional rate taxpayers. It’s more important than ever to make sure you’re protecting your cash from tax.  

The Personal Savings Allowance means basic-rate taxpayers can only earn up to £1,000 in interest before paying tax, while higher-rate taxpayers have a £500 allowance. Additional-rate taxpayers receive no exemption. For those nearing or exceeding their allowance, using a Cash ISA can be a simple way to protect interest from tax. In recent years, many savers avoided Cash ISAs due to low interest rates, but often ISAs are now the more attractive option.  

The limits on these are changing from April 2027 for those under the age of 65, but for now you can still put in up to £20,000 in cash or investments. You should look to maximise your tax free and ISA allowances between couples, potentially moving cash savings to the person who has unused Personal Savings Allowance, unused ISA allowance or is the lower taxpayer.

5. Prepare for the dividend tax squeeze  

Dividend tax changes mean that in the past few years the tax-free dividend allowance has dropped from £2,000 to £500, and the rates have risen too. The dividend tax rates will rise again next April to 10.75% at the basic rate and 35.75% at the higher rate, with no change to the additional rate, staying at 39.35%. As a result of these successive changes, HMRC forecasts that 3.7 million people will pay a total of £18 billion in tax on their dividends this tax year – and that tax bill will get higher from next year when those rates go up again.

Dividend tax is only applied to income-generating investments that aren’t in an ISA or pension. If you are in this situation and have some of your ISA allowance remaining this tax year, you could use a Bed and ISA to move the dividend-paying investments into your ISA and protect them from future tax charges. Because the annual ISA allowance is currently £20,000, you can potentially move £40,000 into your ISA before the latest tax hike starts to really bite by using this year’s allowance now and next year’s as soon as the new tax year starts in April.

If your non-ISA investment pot is larger than your ISA allowances, the smartest move is to prioritise shifting your biggest dividend-paying investments into your ISA first. This means that you can shelter more of your dividend income from tax first and therefore cut your tax bill.

6. Use gifting allowances to reduce inheritance tax  

There was no U-turn or change to plans in the Budget on pensions and IHT, meaning many estates will face higher IHT soon. On top of that, the government announced it was freezing inheritance tax bands for another three years, until 2030-31, meaning more estates will be dragged into paying inheritance tax.  

But there are simple ways to cut how much your estate will pay. Every individual can gift up to £3,000 per year free of IHT, and this allowance can be carried forward if it wasn’t used in the previous year. You can use this either on one person or split between several others. Couples can combine their allowances to give away up to £6,000 tax-free annually (or £12,000 if they didn’t use the allowance last year).

On top of that, extra allowances apply for wedding gifts, with parents able to gift £5,000 to a child, grandparents able to give £2,500 to a grandchild, and anyone else allowed to give £1,000 tax-free. Small gifts of up to £250 per person each year are also exempt. On top of that, other gifts outside of these allowances are called potentially exempt transfers, meaning they only escape IHT if you survive for seven years after making them. If you die within seven years then the value of the gift is added back into your estate, but taper relief might reduce the rate of IHT on it if at least three whole years have passed.

The most generous exemption is for gifts made from excess income, which can be unlimited if they don’t reduce the donor’s standard of living. If you haven’t used up your annual gifting amounts, it’s a good idea to consider it before the end of the tax year.

7. Consider cash alternatives

The Cash ISA allowance will be cut from £20,000 to £12,000 from 6 April 2027 for those under the age of 65. It means those who are putting more than £12,000 into their ISA could face higher tax bills if they leave the money in non-ISA cash accounts and breach their Personal Savings Allowance.  

Cash savers should also assess their cash levels and see whether they are unnecessarily hoarding too much cash. We’re a nation of cash lovers, and that often means we have more in cash than is necessary. It’s a good place for money you need in the short term, your emergency savings pot and money you don’t want to take any risk with, but otherwise you could consider investing.

There are also lots of lower-risk, cash alternatives that you can invest in via your stocks and shares ISA. These include money market funds, which invest in very short-term loans that aim to give a cash-like return. Another option is bond funds, which invest in loans to governments and companies in return for regular interest payments and their original investment back at a set date in the future.

Equally investors can invest in bonds themselves, such as short-dated bonds that typically mature in, at most, two or three years. Gilt versions of these are loans to the UK government, and so it’s pretty certain you will get your loan repaid, along with the interest promised. Alternatively, investors looking for a one-stop-shop for their portfolio could use multi-asset funds, which spread money between different asset classes to give a diversified portfolio. You can opt for different risk levels of these funds to suit your needs.

8. Use all the tax breaks you can

While the government unleashed a £26 billion tax grab, there are still lots of tax breaks available that people may not be using. Do some digging around and see if you’re eligible for valuable government tax breaks or benefits. Check whether you’re entitled to things like marriage allowance, child benefit, free childcare hours, tax-free childcare or other benefits, as it could lead to significant savings.

On top of that, make sure you’re using any allowances you can, such as ISA and pension allowances. Pensions offer one of the biggest opportunities, with basic-rate taxpayers receiving 20% tax relief, while higher and additional rate taxpayers can reclaim an extra 20% or 25% through self-assessment. This means that for a higher-rate taxpayer, every £1 in their pension only costs 60p.

On top of that, a standard ISA will give you a tax break on your investment growth and interest earned, as well as any withdrawals being tax-free. Every adult can pay in up to £20,000 a year into the accounts, but use it or lose it, as once the new tax year hits next April that allowance is reset.

9. Use VCTs before the tax relief gets chopped

Venture capital trusts (VCTs) will get less attractive from next April, as the chancellor revealed plans to cut the tax relief on offer with them. Investors who buy VCTs on the primary market can currently claim a 30% tax rebate on investments of up to £200,000 in each tax year. So potentially an investor could reduce their annual income tax bill by up to £60,000. However, this tax relief is being cut to 20% from April.

These investments aren’t for everyone; they are most often used by experienced, adventurous investors, especially those with large tax bills who have perhaps used up their pension and ISA allowances. But anyone planning to invest in VCTs could consider doing so before April, to lock in the higher tax relief before the rules change, and that tax break gets cut.