This year will bring a number of changes that may impact your wallet, from a freeze to tax rates, to hikes in rail fares and stamp duty changes making homebuying more expensive. We look at the main changes that will impact your money in 2025.
1. Another year of frozen thresholds
April sees the start of a new tax year but, once again, taxpayers will be denied any increase to income tax thresholds or the personal tax-free allowance. Likewise, thresholds such as the Inheritance Tax allowance will be frozen for another year, with Rachel Reeves extending the freeze on the Inheritance Tax nil rate band till 2030.
Frozen tax thresholds punish taxpayers by stealth. When asset prices and wages rise but thresholds fail to keep up with inflation, the result is higher tax bills. And employees face yet another year of frozen thresholds come April. It means another year when our tax bills are set to go up, despite the headline rate remaining the same. That’s because the freeze, which began in 2021, will continue for another year.
We will at least be over halfway through the planned freeze on income tax thresholds by then, although the finish line in 2028 will still feel some way off for those taxpayers snared by the stealth tax raid.
Frozen thresholds apply beyond tax on income as well. Astonishingly, the main Inheritance Tax thresholds won’t have changed in over two decades by the time the freeze is lifted in 2030. Although a new exemption has been introduced since then – the residence nil rate band – it actually doesn’t compensate for frozen thresholds.
2. State pension will rise by 4.1%
UK pensioners should see a sizeable increase to their state pension of almost £500 a year, to bring the full new state pension to just under £12,000 from April.
Criticism of the decision to scrap the Winter Fuel Payment for all pensioners except those that claim Pension Credit still lingers. Government will hope this rise in Brits’ state pensions will publicly reinforce its commitment to the triple-lock, although some will still be reeling from the £200 most pensioners lost this winter.
As a result of the increase, the state pension will be at a level perilously close to the tax-free personal allowance and should overtake it in a couple of years if things continue, thanks to frozen tax thresholds. At that point something must surely give. But slowing the increase in state pension growth or unfreezing the personal allowance both seem unlikely.
It could be that this fast-approaching crunch time means the government will finally be forced to address the question of how much the state pension should really offer, at what age, and how it can increase payments sustainably each year.
3. Employer costs rise thanks to National Insurance hike and minimum wage
The National Living Wage will rise for those age 21 and over from £11.44 to £12.21 from 1 April. At the same time, employer National Insurance will rise to 15% and the threshold at which it starts to be paid falls to £5,000, with the increase starting in the new tax year for 2025/26.
Firms are in line for big hikes to payroll costs thanks to these two increases. Put together it means that it will cost a business almost £2,400 more to employ someone on the minimum wage working 35 hours per week from April this year.
The smallest businesses will be protected from some of these cost increases, as the Employment Allowance will more than double from £5,000 a year – meaning they can claim back up to £10,500 a year on their National Insurance bill. This will also be extended to all businesses, providing some respite for employers.
Nonetheless, the move will raise huge sums for the government and many businesses have indicated they expect to see the cost of staffing increase by millions of pounds.
4. Stamp duty holiday ends
From April the 0% rate of stamp duty when buying a home will drop from £250,000 to £125,000. That is set to cost homebuyers £2,500 if they complete after the window closes.
For first-time buyers the changes are even more significant. At present there is no stamp duty to pay on properties worth up to £425,000 for first-time buyers, but from April that will change to £300,000. The result could be an extra £6,250 on the stamp duty bill for those buying their first home worth £500,000.
It’s very likely we’ll see a rush of completions in March as those looking to buy try to get the deal over the line before the new thresholds kick in on 1 April.
5. VAT on independent school fees kicks in
One of the most controversial policies under the new Labour government, private school fees will no longer be exempt from VAT from this month.
Private schools will be able to offset some of the cost increase by claiming VAT back on goods and services. Labour estimated the net cost for most schools at 15%. It’s up to each school how much of that cost increase they absorb and how much they pass on to parents.
While some parents will opt out of private school altogether in favour of the state system, others will absorb the price hike, make cuts to their budget elsewhere, or ask family for help with the higher fees.
6. Student fees and maintenance loans will rise
Student fees are set to rise for the first time in eight years, by 3.1% (or £285) to £9,535 from the next academic year in 2025/26.
Universities have been calling for an increase in fees and, although they have got one, it’s been described in some circles as little more than a sticking plaster. There’s also the risk that a rise could put potential students off if they feel they won’t get value for money.
Maintenance loans are also going up to help with the increased cost of living. The exact increase depends on whether you are studying in or outside of London, and whether you live at home. But it could prove to be as much as £414 for someone living away from home and studying in London.
Although the fee hikes aren’t as significant a change to student finances as the new ‘plan 5’ scheme that was introduced in 2023, it is still a significant change to the calculations for those applying to university. It’s likely more loans will be written off for lower paid graduates too.
7. Childcare support doubles for some
The continued rollout of the extended free hours childcare funding system will see the free hours entitlement double in September.
This was announced back in 2023 and the rollout began first in April 2024, when 15 free hours were extended to two-year-olds. From September 2024 that then applied to children from nine months. Eventually, in September 2025, entitlement will be increased to 30 free hours from when children are nine months old. It will mark a major increase in childcare subsidies by the time it is in full force.
However, some people won’t get the full benefit. Those households where there is an earner with income over £100,000 stand to miss out on the new arrangements.
That compounds the impact of the £100,000 ‘cliff-edge’ which sees higher earners lose out on tax free childcare worth up to £2,000 per child as well. In total, families with two children aged nine months and two years old could miss out on £20,000 of additional support by September 2025.
In contrast, families where the main breadwinner earns £60,000 could access all of this support, with the figures illustrating how middle-income families have benefitted hugely from government reforms to child benefit and free hours childcare funding in the last couple of years, but the highest earners are excluded.
Source: AJ Bell. Assumes a family where both parents work and the main breadwinner earns £60,000. Children aged nine months and two years old as at the start of each academic year. September 2023 figures factor in 50% entitlement to child benefit, accounting for the April 2024 changes to HICBC. Value of free hours based on UK average hourly childcare prices in Coram childcare survey 2024, uprated by 2% for 2025.
8. Commuters face rail fare hike
The Budget handed rail passengers a surprise about as unpleasant as arriving at the station to find a replacement bus service.
The annual increase in rail fares is normally linked to the RPI measure of inflation from July of the previous year, which back in the summer stood at 3.6%. In recent years the government has deviated from the usual practice of raising rail fares by this amount every January, instead delaying the price increase as well as reducing it from the headline RPI rate during periods where it was sky high.
Instead of doing the same for another year, however, the government has decided the regulated rail fares cap will rise by 4.6% from March 2025, a full percentage point above the RPI reference point from July 2024. Rail passengers who faced widespread cancellations over Christmas will look ahead to that forthcoming price hike with considerable irritation.
9. IHT on pensions consultation
Announced at the October Budget by chancellor Rachel Reeves, proposals to apply IHT to unused pension assets on death are due to be introduced, subject to a consultation, which closes on 22 January.
AJ Bell has opposed the proposals, suggesting two alternative options. This could mean utilising a similar treatment already applied to ISAs on death. Alternatively, income tax applied on withdrawals at the marginal rate of the beneficiary represents another simpler option.
Read more about changes to pensions and IHT.
Important information: These articles are for information purposes only and are not a personal recommendation or advice. Remember that the value of investments can change, and you could lose money as well as make it. Tax and pension rules apply.
