The UK 2025 budget was highly anticipated after months of speculation in the press, with almost all of the coverage painting a negative outlook. This was the first major Budget of the new Labour government, which had repeatedly assured the public that it would not be raising taxes and would protect “working people.” At the same time, the UK was facing a £20 billion fiscal shortfall, raising questions and uncertainty around how the government would balance its books. To add to the chaos, the entire contents of the budget were leaked before Chancellor of the Exchequer Rachel Reeves delivered the budget statement, entitled “Strong Foundations, Secure Future.” So what do Israelis with UK connections need to know?
Labour’s original manifesto pledged not to increase taxes on “working people,” and the government consistently maintained that there would be no rise in income tax, National Insurance, or VAT rates. However, the 2025 budget sidestepped these assurances by raising taxes on property, dividends, and savings income, targeting areas seen as affecting the wealthy rather than “working people.”
Specifically, the budget statement announced that the ordinary and upper rates of tax on dividends would increase by 2% from April 2026, and that the tax rate on savings income would rise by 2% from April 2027.
UK property investment
From April 2027, the UK will implement new property-specific tax rates:
- the property basic rate will be 22%,
- the property higher rate will be 42%,
- and the property additional rate will be 47%.
This effectively adds an extra 2% burden for landlords, prompting concerns about the potential knock-on impact on rents.
Some property investors will also face the new “mansion tax,” officially called the High-Value Council Tax Surcharge, from April 2028. The surcharge starts at £2,500 annually for homes valued at £2 million or more, scaling upwards for more expensive properties. Valuations will be undertaken by the Valuation Office and carried out every five years. The surcharge is payable by the property owners.
The Labour government considers increasing property taxes to be fair on the basis that property is “one of the most significant asset classes in which wealth is held in the UK.” The combined impact of higher property and rental income taxes, alongside the mansion tax, raises an important question for investors: Will the increased tax burden make property investment in the UK less attractive? Borrowers will also be closely watching UK interest rates and inflation forecasts, given their direct impact on financing costs.
Fiscal drag
In the Spring Statement in March 2025, Rachel Reeves emphasized that she had considered extending the tax threshold freezes until 2030 but ultimately limited the freeze to 2028. In the 2025 budget, however, she announced that key tax thresholds would remain frozen until April 2031. This applies to:
- Income tax Personal Allowance
- Higher income tax rate threshold
- Additional income tax rate threshold
- Inheritance tax nil rate band
This measure, known as fiscal drag, effectively forces taxpayers to pay more even though the statutory tax rates remain unchanged. Historically, thresholds have been raised in line with inflation, but recent freezes have meant that as earnings rise with inflation, more income is pushed into higher tax bands. The extension of the freezes until April 2031 will be impactful.
Pensions
The UK will “put an end to those living abroad being able to buy cheap access to a UK state pension.” From 6 April 2026, UK nationals living abroad will no longer be able to pay Class 2 voluntary National Insurance contributions to fill gaps in their UK state pension record. Instead, expats will only be able to pay the higher Class 3 contributions, and only if they meet a new 10-year minimum residency or contributions requirement (currently at 3 years). Many expats seeking to maintain UK state pension eligibility will face higher costs and stricter qualifying conditions.
Between the UK and Israel
People who plan to return to the UK after a period abroad (typically within 6 years) need to be aware of changes to anti-avoidance rules for temporary non-UK residents. Broadly, from 6 April 2026, the UK will tighten rules whereby certain income and gains will be subject to UK tax in the year the person becomes UK resident again. This includes distributions from “close companies,” which are companies controlled by up to five shareholders.
It’s worth noting that from 6 April 2025, in place of the domicile status, newcomers to the UK will enjoy a UK tax exemption on all non-UK foreign income and gains for their first four years of UK residency. From year five, they will be taxed on all profits in exactly the same way as standard UK taxpayers. Globally mobile taxpayers must take specialist advice on how to enjoy tax benefits while steering away from tax risks.
Investing in the UK
The UK maintains that “the UK is the best place in Europe to start a company,” but also recognizes that “unless more of these companies scale and stay here, the growth benefits will not be fully captured in the UK.” The UK therefore revisited its criteria for available tax incentives for start-ups to help them grow and scale up. From 6 April 2026, the UK government will raise the gross asset thresholds for three key investment and employee incentive schemes:
- Enterprise Investment Scheme (EIS) – encourages investment in early-stage and high-growth companies.
- Venture Capital Trusts (VCTs) – provides tax-efficient opportunities for investors to fund UK companies.
- Enterprise Management Incentives (EMIs) – allows companies to offer share options to employees with favorable tax treatment.
These changes will make the schemes more accessible to growing and established companies. It encourages the companies to remain based in the UK and to raise capital domestically rather than abroad. It’s worth noting that the available income tax relief for future investors into VCT schemes will be reduced from 30% to 20%.
The main rate of corporation tax remains frozen at 25%, with both the small profits rate and the marginal rate also remaining unchanged. The UK maintains that its main corporate tax rate of 25% is the lowest in the G7.
Conclusions
The UK remains open for business and investment, but with sharper rules and greater scrutiny. A key lesson from the 2025 budget is the importance of not making and then breaking promises: while the government avoided any single large revenue-raising measure, it found funds from a variety of sources, spreading the burden across property, savings, dividends, and fiscal drag.
Will these proposals truly build “Strong Foundations,” and will taxpayers see the UK as the place for a “Secure Future”?
Claire Shelemay, BFP FCA, is the founder of CrownStone Consulting – a UK tax boutique in Tel Aviv focusing on UK tax advisory and UK-Israel tax issues.
Published by Globes, Israel business news – en.globes.co.il – on November 27, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.