Bitter taxation pills to swallow, arguably all the more indigestible for those separating or divorcing

We are now nearly a week on from the Budget and still the fallout continues to monopolise headlines and column inches as much, if not more, relating to the OBR fiasco and political process as the Budget approached than the substance itself.  Perhaps that is because the substance itself was much less seismic than many had foreshadowed, but it is still a bitter pill to swallow for many households, even more so for those feeling the strain of divorce.  

We previously considered some of the potential changes anticipated in the budget as long ago as early September: Pumpkins, properties and pensions: A Family Lawyer’s warnings ahead of the Autumn Budget. Ultimately, few of the mooted changes were actually implemented as the Chancellor benefitted from better than expected forecasts on wages and tax receipts as the Budget approached, allowing her to tread a little more carefully with some of the taxes that had been anticipated.

That being said, the economic outlook is far from rosy and taxes are biting increasingly heavily on households.  Where household finances are already under strain as a result of divorce, the impact of these taxes will be exacerbated. And, whilst there are a number of tax changes that will directly bite on individuals and couples, there are wider implications which may loom larger and impact more heavily on couples who are going through separation or divorce. 

In our recent article The “former matrimonial mansion” – how the new “mansion tax” could reshape divorce we considered one of the tax changes most likely to impact divorcing families, the “mansion tax”. Here we consider some of the other key tax changes and their impact on separating families:

• Freezing income tax thresholds – There has been a lot of press coverage about “fiscal drag” and the consequences of freezing the income tax thresholds for a further three years. Net take-home pay will be reduced as earnings rise into higher tax bands, further compressing affordability across two households for couples who have separated/are separating. Narrower headroom within which to cover spousal maintenance, child maintenance and possibly also private school fees (now with added VAT) increases the risk of budget deficits in both homes.  Ongoing maintenance arrangements are always susceptible to variation in appropriate circumstances and the (combined) impact of these measures may require that.
• Pension contributions – With effect from 2029, the amount that employees can “sacrifice” from their salary (and in doing so avoid National Insurance contributions) will be capped at £2,000 a year.  Since 1 December 2000 the English courts have had the power to make pension sharing orders on divorce.  Along with the matrimonial home, a personal pension is often one of the most valuable assets in a case and pension savings have been encouraged due to their tax treatment which has, historically, been very favourable.  Will future pension pots shrink as pension savings become less attractive from a tax perspective and as household budgets require available funds to be redirected from pension savings to meet burgeoning outgoings?  Pension contributions are also a factor that feeds into fairly rigid formulae to calculate the appropriate amount of child maintenance payable.  Where the paying parent adjusts their pension contributions as a result of these tax changes, there is likely to be an (unintended) impact on child maintenance payments.
• Wealth migration – As the tax burden becomes increasingly heavy and with the impact of last year’s changes to the taxation of “non‑doms” still being felt, HNW emigration continues.  Accordingly, there is increased likelihood of jurisdiction races, forum disputes, and/or applications to the English Court for financial provision after foreign divorces. While London’s status as the “divorce capital of the world” persists, the continued mobility of HNWs complicates enforcement and heightens the premium on forum and asset‑protection planning for divorce proceedings.

Across the board, it is difficult for any family to bear the combined impact of (i) the ever-increasing burden of heavier taxation, (ii) inflation that continues to outpace targets and (iii) stagnant wages as employers absorb increased overheads (including National Insurance increases last year), still more so for those going through separation and divorce. To maintain a standard of living, particularly for children post separation, maintenance assessments may need to rise. 

Overall, for the middle classes, divorce is never likely to have been as costly as it will be after the changes announced in the 2025 Budget take effect. The Budget will make divorce and separation more costly, more complex, and more emotionally draining. The tax measures, while fiscally driven, will have deeply personal consequences for the thousands of people trying to navigate family breakdown.