Following the Budget delivered on Wednesday 26 November, Resolution’s Finance, Pensions and Tax Committee set out the key points family law practitioners should be aware of and how they may impact divorcing couples:
- Income tax:
- Whilst Income Tax rates on employment income remain unchanged, the Personal Allowance, higher rate and additional rate thresholds have been frozen for a further three years and will remain so until 2031, meaning more clients will be pulled into higher tax bands over time (‘fiscal drag’). This may be a particular concern to those paying RPI / CPI linked maintenance orders where even inflationary pay rises will fail to deliver inflationary uplifts in take home pay. Practitioners may wish to consider indexing maintenance payments to the payer’s net income instead in appropriate cases.
- The Government are introducing higher tax rates for property, dividends and savings income. The provisions are complicated with
- Income Tax on dividends for ordinary and higher rate tax payers (not additional rate tax payers) increasing by two percentage points (to 10.75% and 35.75% respectively) with effect from 6 April 2026;
- Income Tax on savings income for all tax payers increasing by two percentage points (to 22%, 42% and 47% for basic, higher and additional rate tax payers respectively) with effect from 6 April 2027; and
- an additional two percentage points for property income (creating a new separate tax rate for property income, aligned with tax on savings income – so at 22%, 42% and 47%) being introduced from 6 April 2027. Finance cost relief will be provided at the separate property basic rate (22%).
Particularly where clients derive a significant proportion of their income from savings and investments, care should be taken around (a) computation of net earnings within settlement negotiations and (b) assessment of affordability going forward.
- Benefits:
- The controversial ‘two-child benefit cap’ on means tested benefits will be scrapped from 6 April 2026. For cases where the parties have three or more children and are in receipt of (or could be in receipt of) Universal Credit, this may increase the income available to the family and should be taken into account in calculating and structuring settlements. A reminder that spousal maintenance receipts are considered “unearned income” for Universal Credit calculations and therefore attract a pound-for-pound reduction to the benefit concerned.
- Council Tax and other considerations for parties’ budgets:
- From April 2028, the ‘Mansion Tax’ (the ‘high value council tax surcharge’) will be introduced, with residential properties worth over £2million facing an annual surcharge of £2,500, rising to £7,500 for properties worth over £5million. Budgets in appropriate cases may need to be adjusted, and observers will watch with interest as to whether this may have any impact on the housing market at or around the £2million mark.
- Those working with clients on their budgets may also want to bear in mind (a) the extension of the 5p fuel duty cut for an extra five months (to September 2026), (b) the reduction of household energy bills (by an average of £150) and (c) the planned introduction of a new excise duty on electric cars from April 2028.
- Pensions
- From April 2029, salary sacrifice for pension contributions will be capped at £2,000 with any contributions above that level to be taxed in the same manner as employee pension contributions (i.e. without the accompanying NI saving). To the extent this impacts the ability of divorcing parties to rebuild their pensions post pension sharing in a tax efficient manner, some clients may wish to factor this into their decision making as to settlement structures.
- Otherwise, the Government maintained its commitment to the Triple Lock for the duration of this parliament: from April 2026 the State Pension will be increased by 4.8% (up to an extra £575 per year for pensioners).
- The Government are pressing ahead with IHT on pension benefits which will be introduced in April 2027. This will mean that pension funds nominated for cohabitees will be subject to an IHT charge whilst pensions nominated for spouses or civil partners will be exempt from IHT.
- Inheritance Tax:
- The forthcoming £1million allowance for Agricultural Property Relief and Business Property Relief (announced previously) will now be transferable between spouses and civil partners (to the extent not used on the first death). For those couples holding qualifying assets, particularly those separating later in life, the loss of the transferable relief (which otherwise operates to effectively provide for up to £2million of relief on the second death) may be something worth considering with clients and their advisers, particularly where there may be more tax efficient alternatives to divorce which could preserve wealth for the family as a whole.
- ISAs
- Family lawyers should also be aware of the changes to ISA allowances taking effect from April 2027: whilst the allowance will remain at £20,000 per year the limit on investment in Cash ISAs will be £12,000 per annum, which may impact financial planning decisions. Those aged 65 and over will be exempt from this provision.
In addition, those professionals working in the family law field should remember the following measures which have been previously announced and which are set to be implemented from 6 April 2026:
- The introduction of a revised tax regime for carried interest such that it will sit wholly within the Income Tax framework, clearly impacting those divorces where carried interest makes up a significant portion of a party’s remuneration;
- The CGT rate for Business Asset Disposal Relief and Investors’ Relief increasing to 18% (currently 14%, having increased from 10% in April 2025);
- Wide reaching reform of Agricultural Property Relief and Business Property Relief for IHT purposes – on the face of it not a huge consideration for divorcing couples but already leading to significant movement of wealth down the generations in families, leading to an increase in the need for Pre and Post Marital Agreements, and arguably, therefore, a greater likelihood of ‘non matrimonial property’ arguments in cases going forward.
As always, where cases involve complex tax and financial planning concerns, family lawyers will want to work carefully with client’s accountants and financial advisers when considering the potential structures and approaches to settlement.
