Chancellor Rachel Reeves has delivered her second Budget, unveiling a range of tax and spending measures that will have significant implications for insurers, brokers, and their clients. While the headline announcements focused on personal taxation, pensions, and property, the details reveal a series of changes likely to affect the insurance sector’s operating environment, client needs, and product demand.
One of the most consequential measures for insurance professionals is the extension of the freeze on National Insurance (NI) and income tax thresholds for an additional three years beyond 2028. This “stealth tax” is expected to drag more individuals into higher tax bands, reducing disposable income and potentially impacting demand for protection, savings, and investment products.
Charlotte Kennedy, chartered financial planner at Rathbones, commented: “Extending the freeze on thresholds, one year more than expected, is the government’s main lever to plug the multi-billion-pound fiscal gap. But this stealth tax quietly squeezes household budgets, dragging more people into higher tax bands even though their real purchasing power hasn’t improved. Fiscal drag means a bigger slice of any pay rise lost to tax, which could discourage promotions or overtime… By reducing disposable income, fiscal drag weakens consumer spending – a key driver of growth – and could in turn exacerbate the UK’s already sluggish recovery.”
Rathbones estimates that someone earning £100,000 by April 2025 would face an extra tax burden of £4,043 due to the extended freeze, with lower but still significant impacts for those on £80,000, £50,000, and £35,000.
The Budget introduces a cap on salary sacrifice for pension contributions, with National Insurance to be paid on contributions above £2,000 a year from 2029. This move is likely to affect the design of employee benefits and group pension schemes, as well as the attractiveness of salary sacrifice arrangements.
“Capping salary sacrifice at £2,000 is a blunt instrument that risks doing more harm than good. It would strip away a key incentive for employers to boost pension contributions, undermine efforts to tackle the retirement savings gap, and pile extra costs on businesses already under pressure… This isn’t just a technical tweak - it could have real-world consequences for workers’ futures and employers’ ability to offer competitive benefits,” said Rebecca Williams, divisional lead of financial planning at Rathbones.
Her words were backed by Cheryl Brennan, managing director of Howden employee benefits & wellbeing, who did at least find some silver lining among the clouds. “While the cap on how much staff can pay into pensions using salary sacrifice is not an outcome of the Budget that we welcome, even with the changes announced today, employers and employees should continue to make use of what is available and implement it now, if they have not already, especially given changes won’t take effect until April 2029,” she said. “Salary sacrifice is a powerful tool, but it remains significantly underutilised. Our recent employee benefits research shows that 68% of UK SMEs still don’t use pension salary sacrifice.”
The decision to keep Insurance Premium Tax (IPT) for health insurance at 12% drew criticism from industry voices, who argue that the policy is at odds with the government’s stated goal of reducing long-term sickness and getting more people back to work.
“Keeping Insurance Premium Tax (IPT) for health at 12% is a missed opportunity at the worst possible time. With long-term sickness at record levels, taxing people and businesses who are trying to stay healthy makes little economic sense. Health insurance isn’t a luxury good; it’s a core part of national resilience,” said Dave Cooper, CEO at Westfield Health.
“Removing IPT would have made workplace health support – such as health cash plans and private health insurance – more affordable, helping to expand healthcare capacity across the system and relieve pressure on an overstretched NHS. It would have opened the door to earlier intervention and kept more people in work rather than stuck on long waiting lists.
“Instead, the Government has chosen to maintain a barrier to prevention at the very moment it says it wants to ‘get Britain working’.”
The Budget introduces a new council tax surcharge for properties in England worth more than £2 million, which may affect demand for high-net-worth household insurance and related risk management services. Additionally, a new mileage-based tax for electric and plug-in hybrid vehicles will be introduced from 2028, a move that could influence motor insurance uptake and the transition to electric vehicles.
“We believe that the decision to introduce a pay per mile tax on electric vehicles will negatively impact the pace of EV uptake,” said Admiral in a Press statement. “Our research shows that 65 per cent of those looking to switch to an electric car do so for the associated cost savings. While we support the Chancellor’s extension of the EV grant, ensuring that the conditions for maintaining an EV remain favourable is key to encouraging more people to make the switch.”
The Office for Budget Responsibility (OBR) has upgraded its UK growth forecast to 1.5% for 2025, with inflation expected to fall to 2.5% next year and return to target by 2027. However, business leaders and investors have expressed disappointment at the lack of targeted relief for companies.
“The best thing we can say about this Budget is that it's over,” said Fred Soneya, co-founder and general partner at Haatch. “All the noise and speculation in recent months have been damaging to business and investor confidence… Corporation tax, national insurance and business rates – business leaders would have loved to see the Government make reductions to one these major taxes. That was never going to happen, so the more modest and realistic hope was that there would at least be some targeted relief or support in other areas, but even there still isn’t much to celebrate.”
While the Budget offers some clarity for planning, insurance professionals will need to work closely with clients to navigate the new fiscal landscape, adapt product offerings, and provide advice on tax-efficient solutions and risk management in an evolving regulatory environment.
