Budget 2025: Calm gilt markets, chaotic savings incentives

Key takeaways

• Gilt markets stayed calm, with no plot twists in the Budget
• Salary sacrifice and freezing tax thresholds makes it harder for savers
• Structural reforms remain absent from the list of policies

The November UK Labour Budget arrived anti-climatically, like a sporting event where everyone already knows the final score. Most of the budget tax increases had been widely trailed, with the early publishing of the OBR report causing more controversy than the Budget itself.

The OBR’s weaker growth forecast did more to move gilt yields than any policy announcement. In fact, softer growth expectations may give the Bank of England more confidence to start nudging rates down, assuming inflation falls.

Gilt yields did fall rapidly when the OBR leak occurred, but ten- and twenty-year yields have since settled, drifting slightly lower as markets concluded that nothing in the Budget warranted a plot twist.

The reduction in the Cash ISA allowance has made noise, but the practical impact will be modest. Savers will likely redirect their money elsewhere and it’s unlikely that this change will suddenly direct capital into UK markets, with most options within Stocks and Shares ISAs having a very small allocation to the UK.

Meanwhile, freezing tax thresholds till 2031 will continue to pull more workers and pensioners into higher tax bands each year. It is a stealth fiscal drag that will squeeze disposable income and undermine the incentives to save at a time when it should be a priority.

The biggest shift for pensions following the Budget announcement is the cap on salary sacrifice. Only the first £2,000 of sacrificed salary will now benefit from National Insurance advantages. Everything above that faces full charges.

This matters because salary sacrifice has been one of the simplest and most effective mechanisms workers use to build their pension pots. Altering the economics of it will change behaviour and not necessarily in the direction the UK’s retirement issues require.

Mid-career earners that are already balancing higher costs and the need to save more, will feel this change the most. Combined with the frozen tax thresholds, and the effect is predictable: Lower take-home pay, weaker incentives to save, and greater pressure on future retirement outcomes.

Despite the Budget being positioned as an opportunity for structural reforms, and a number of policies being floated in the lead-up, there were notable absentees.  

The Budget did not:

• Change tax-free cash rules
• Progress Mansion House reforms
• Simplify the ISA system
• Deliver a capital-markets package to boost UK investment

For markets, today’s package may support a steadier backdrop. With weaker growth expectations, the path to earlier rate cuts looks slightly clearer. For pension schemes managing hedging and collateral, stability is welcome. With fiscal headroom and volatility both issues at play, it’s worth remembering that this will not be the last Budget to stir speculation; the cycle will start again next year.

For savers, the path is more challenging. Behaviour-shaping measures including reduced incentives, frozen thresholds, and tighter disposable income, will do more work than the headline tweaks.

This Budget will not be remembered for market disruption. However, it may be remembered for making it harder for savers to do the right thing. Salary sacrifice reform and frozen thresholds are not the tools you reach for when trying to rebuild a stronger savings culture.

The gilt market may be calm. Savers, on the other hand, have just been asked to row a little harder.