Budget changes: time to prepare

January 2026

The UK budget may seem a distant memory after a tumultuous start to 2026, but it is still likely to affect your finances in the year ahead. Frozen tax allowances, higher tax rates on dividends and savings, plus changes to cash ISA limits could have implications for how you save and invest.

The budget may have been in November, but the real effects will start to come in from the start of this tax year (6 April 2026) and next. The first change you are likely to notice is the frozen tax thresholds. Successive chancellors have sought to shore up the government’s finances with the neat trick of freezing the thresholds for income tax. This means that while the level of tax remains the same, more people are brought into high rates of tax as pay rises and inflation take effect.

Income tax thresholds have now been frozen since 2021. At that point, 4.4 million people paid tax of 40% on some of their income, according to data from HMRC. By the 2027/28 tax year, it is estimated that an extra 12 million people will be higher rate taxpayers, and a further two million will pay the additional rate of income tax.

It is not just the income tax thresholds where freezes are a problem. At £100,000, you start to lose your personal allowance at the rate of £1 for every £2 over the threshold. At £125,140 it will be gone completely. This leaves an effective rate of 60% on earnings between £100,000 and £125,140. This £100,000 threshold has remained the same since it was introduced in April 2010, with up to 700,000 earners caught in the trap. The £60,000 level over which people start to lose their child benefit is also unchanged for the 2026/27 tax year.

Dividend and savers tax

There was also bad news for those who draw an income from savings held outside a tax wrapper such as an Individual Savings Account (ISA) or pension. The rate of dividend tax will increase from 8.75% to 10.75% for lower rate taxpayers, and from 33.75% to 35.75% for the upper rate from April 2026. The additional rate remains unchanged at 39.35%.

There will be a similar increase on savings income, which will increase by 2 percentage points across all bands. The basic rate will rise from 20% to 22%, the higher rate from 40% to 42%, and the additional rate from 45% to 47% from April 2027. Property income will see similar increases.

These increases come on top of recent changes to capital gains tax. In the October 2024 budget, the main rates of Capital Gains Tax increased from 10% and 20% to 18% and 24% respectively. It means the cost of not holding assets within a tax wrapper has leapt.

The value of tax wrappers

Facing ever-higher taxes on your savings and investments, ISA and pension wrappers are now increasingly valuable. The recent speculation around pensions has been unhelpful and may have deterred some investors, but they remain a key option for long-term tax-incentivised savings. While the news that unspent pension pots will be subject to inheritance tax from April 2027 is unwelcome, pensions still offer tax relief on contributions of up to 45%, and a 25% tax-free lump sum when you start to take your pension. All income and gains generated by investments held within a pension are tax free. Another valuable perk for pensions is that contributions bring down your taxable income, potentially bringing you below the tax thresholds.

It is a similar picture for ISAs. As more and more of your income is subject to tax, the value of a tax-free income stream increases. ISAs have no tax incentives on contributions, but all income withdrawn from an ISA is tax free. With a carefully curated portfolio of income generating assets, you could generate a long-term, tax-free income stream for life. In common with a pension, all income and capital gains generated within an ISA are tax-free.

Cash ISA changes loom

The Chancellor also made changes to the amount savers can put in a cash ISA from April 2027, with the limit reduced from £20,000 to £12,000 for the under-65s. Cash ISAs remain a popular option, even if advisers generally recommend that investors only hold the equivalent to three to six months net expenditure in cash, with the remainder of their savings in longer-term assets with a higher potential return.

For investors weighing up the balance of their savings, it is worth considering that it is not an all or nothing decision – a high-risk investment versus cash. There are all shades of investment in between. In particular, picking an income investment to hold in your ISA can be a good idea. Not only does this help create a long-term tax-free income stream, but it can also bring stability to a portfolio – knowing that whatever happens in markets you are getting 4-5% back as income each year, growing in line with inflation, can be reassuring when volatility hits.

Many investment trusts have a mandate to deliver high and sustainable dividends that grow in line with inflation or higher every year. The Aberdeen Equity Income Trust has a 25-year track record of increasing its dividend every year. Murray International has 20 years. Asian Income Fund and Dunedin Income Growth are hot on their heels (16 and 14 years respectively). Investment trusts can reserve income in buoyant years, to sustain the dividend in weaker years. A number of our trusts have already built-up significant reserves, ready to pay out if the investing climate weakens.

The changes to savings and investments in the year ahead are significant. They should prompt an evaluation of how you save and invest, the balance of assets in your portfolio and their vulnerability to tax. There are more changes coming from 2027 and beyond, including changes to the salary sacrifice regime and a potential mansion tax for homes over £2m. Your finances will need to be fighting fit in anticipation.

Important information

Risk factors you should consider prior to investing:   

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

Find out more at aberdeeninvestments.com/trusts or by registering for updates. You can also follow us on X, Facebook and LinkedIn.