Unpacking the budget: How it could affect divorce and financial settlements

One of the most talked about budgets in recent memory has now landed. It arrived after weeks of media teasers, a few perceived U-turns and then an OBR clanger in releasing the budget papers early. With Rachel Reeves having now packed up her red box for another year, the real work begins in analysing the measures introduced. Below are reflections on the changes and how they may affect people navigating separation and divorce.

Introduction of ‘The High Value Council Tax Surcharge’, the so-called ‘Mansion Tax’

What is happening: With effect from April 2028, owners of properties worth more than £2m will pay a minimum of £2,500p.a. more in additional council tax, up to a maximum of £7,500p.a. additional tax for properties worth more than £5m.

Relevance for separation and divorce: It is hard to predict the full consequences, as the housing market will take time to respond. However, we believe this is potentially a big issue for separating couples over the next few years both in terms of capital and income issues.

For couples who are primarily asset rich, including perhaps those who have retired, it may have the most significant impact as funding these taxes will become an additional headache to solve. The financially weaker party, who often seeks to retain a family home, will in due course have a harder time affording to run it. That may see increased claims for spousal periodical payments, but also more opposition based on affordability. For those relying on mortgages, it is anticipated affordability criteria will also significantly impact their borrowing capacity.

There is likely a bit of time to figure out how the income position will work. The impact on capital is likely more immediate. In the short-term, there may be increased movement in the wider housing market, not least because the much-touted abolition of SDLT did not materialise. However, the properties captured by the new measures have potentially become less valuable overnight. Some experts are suggesting that anywhere between 2% and 5% of the value will be wiped out as buyers factor in the additional costs. For properties that are on the brink of one of the new thresholds, they will inevitably be pulled under it by market forces. That means considering property valuations on divorce very carefully as the market response settles over the coming months and even years. A more robust look at property valuations is going to be needed, especially where looking at delayed sales.

We anticipate that these new taxes will make the most significant aspect of many divorce negotiations, what to do with the family home, even more difficult to resolve amid the growing uncertainty. When considering the emotional attachment that goes with a family home and the time of stress posed by a divorce, this is unhelpful at best.  

Changes to salary sacrifice pension schemes and ISA allowances

What is happening: The headline change to pensions is that a cap of £2,000p.a. will be introduced from April 2029 in relation to salary sacrifice pension contributions. It is not yet clear how this will work but inevitably it will impact both employers and employees, particularly high earners. The changes to ISAs are clearer, with a reduction in how much can be placed in cash ISAs for people aged under-65 from April 2027 to £12,000 (down from the current £20,000).

Relevance for separation and divorce: Again, this could have an impact on those dealing with separation and divorce as it will alter the planning for retirement, potentially income structures and how we structure settlements.

The pension changes will create uncertainty until we know how they will work. Situations where high-earners who would once have given away pension willingly, knowing they could ‘make it back’ in a tax-efficient way, may now be more reluctant to do so. Likewise, those that have already built-up large sums in cash ISAs will likely be reluctant to release them out of those tax-efficient wrappers. This will create a further potential negotiation point to retain already locked-in tax efficient wealth, particularly considering the increase to tax on savings income.

Another key impact may be that stated incomes increase as employers look to restructure income packages. In turn, this may increase the income that is automatically available for child maintenance calculations. Depending on how this pans out, there may even be scope for looking at old settlements that include spousal maintenance, which may start to look unfair. Watch this space on how employers react.

Income tax and NI thresholds frozen for longer and increases to income tax on income from properties, savings and dividends

What is happening: In broad terms, more tax will be paid on income. As incomes generally rise, either with inflation or promotions, more people will be caught by higher tax brackets and generally pay more tax. For income from properties, savings and dividends, it is broadly a 2% increase.

Relevance for separation and divorce: There will be a direct drop in income for some, and others will see expected income increases suppressed due to the tax burden. Given that separation frequently puts pressure on incomes, as couples lose the economies of scale of one household and transition to two, this is significant for those separating or divorcing. This will only serve to increase the focus on what can be a complex and highly discretionary area of law: income and income needs. While it is common practice in the work we already do, it will become increasingly important to project into the future and understand what the position will look like. For many the inflationary increase in expenditure will likely outpace the inflationary increases in income as a result of the thresholds remaining static. We regularly work alongside specialist financial planners who can help guide on this and model what divorce settlements will look like as the years unfold. The simple reality is that for many there will be less income available to pay maintenance.

Removal of the two-child benefit cap with effect from April 2026

What is happening: This lifts the current cap on being able to only claim the child elements of Universal Credit (formerly child tax credit) for the first two children. Once the cap is removed, those elements can be claimed for every child. Every situation will be different, but it is estimated this will add income to families where Universal Credit is being claimed of approximately £3,500 p.a per child at current rates.

It is important to note that this change has nothing to do with Child Benefit itself; something which can itself require significant consideration on separation.

Relevance for separation and divorce: For those families where Universal Credit is relevant and where they have more than two children (ignoring those circumstances where the cap didn’t apply previously), this potentially represents a significant change in available income. Given that child maintenance formulas remain untouched and that child maintenance will not impact benefit entitlement, this sees more money ‘following’ the children in these situations. This could see even more consideration being given to the availability of benefits when negotiating settlements for these families. Some have suggested that the change in income could be significant enough (in these types of cases) to warrant a variation of existing spousal maintenance. While each case should be considered uniquely, there will be very few cases where that would be applicable.

The crypto-asset reporting framework

What is happening: In addition to previously announced requirements for declaring crypto-assets to HMRC, another measure was announced in the budget that perhaps went under the radar a little. With effect from 1 January 2026, UK based crypto-providers will be required to report data on UK resident customers, in effect creating the ability for there to be a register of these crypto-assets.

Relevance for separation and divorce: Crypto-assets continue to rise in popularity and often continue to pose a problem on separation or divorce due to the ability to hide such assets. There are already things that can be done to track down crypto-assets that an unscrupulous spouse has failed to disclose, but the measures are often expensive such as involving forensic accountants, specialist tracers or poring over years of bank statements. However, if a register does materialise (and coupled with the requirement to report on tax returns), this could mark a further milestone in making it easier to ensure financial disclosure obligations have been met in the future.

For anyone facing separation or divorce, or for those looking at nuptial agreements, the key is always to take early, expert advice. Planning is critical and working with specialist family solicitors, who will work alongside tax experts and financial planners is essential.​​​​