Budget 2025: Commentary and Analysis

Introduction

The Isle of Man budget process this year has been a peculiar one. 

Most of the attention in the run up to the budget was focused on the potential ending of the ‘triple-lock’ promise for state pensions which means pensions increase by either 2.5%, inflation or earnings growth, whichever is highest. 

However, following Tynwald’s unanimous decision to postpone the discussion about ending of the triple lock promise to its own debate, the triple lock promise remains in place and there was a 4.1% increase to the basic state pension announced in the budget. 

Addressing barriers to population growth

Instead, the changes in the budget seem to have been driven more by the Economic Policy Review Committee’s (“EPRC”) first report into the barriers to population growth in the IOM. 

As a reminder, part of the Government’s Island Plan is to grow the Island’s population to 100,000 by 2037. To achieve this aim, the Government is going to need significant net inward migration and an increase to the birth rate. The EPRC’s report highlights three specific factors that the EPRC considered fundamental barriers to achieving this population growth:

1. A cost-of-living differential with the UK
2. Mortgage rate differential with the UK
3. Personal tax differential with the UK

Of particular interest with regards to the budget is the 3rd point, where the report highlights how IOM residents on median incomes were paying essentially the same amount of tax when compared to counterparts living in the UK but those on large income were significantly better off than there UK counterparts. The EPRC report states this creates a barrier to entry for younger workers. 

The Treasury Minister framed this budget as one that would provide “certainty for our businesses, to put more money in people’s pockets” which is potentially an attempt to combat the 3rd of these barriers.

Key budget measures and tax changes

Some of the key changes announced seem to support this aim, but we are left wondering do they go far enough to attract young workers to the Island.

• A reduction in the higher rate of tax from 22% to 21%. 
• An increase in the Class 1 Primary, Class 1 Secondary and Class 4 thresholds which will increase the amount most workers can earn before they start to pay National Insurance.
• The income tax personal allowance will rise by £250, meaning individuals will only start paying tax on income once they earn over £14,750. For jointly assessed couples the allowance is £29,500 (Up £500).
• More families will qualify for Child Benefit, with income thresholds rising by £10,000 to a maximum of £90,000.

Per the Treasury’s calculations, a single person with a gross salary of £35,000 (close to the median on the IOM) will be £238.26 better off because of these changes then they were last year. 

Is this good news for the Island’s workforce? Yes! Will this budget attract younger workers to relocate to the IOM? Probably not.  

Simon Nicholas, Managing Partner in Isle of Man, noted, "The personal tax changes in this year's budget do not feel sufficient to bridge the gap for the much higher cost of living on the island when attracting young professionals to the island. This is worsened by the withdrawal of the national insurance holiday tool for businesses. We appreciate there is limited ammunition in the stores for this budget as finances are tight; however, without bold action to attract younger workers to the island and a complete rethink for key drains on public finances, such as the cost of the health service and state pension, finances will only get tighter."

With the Budget now delivered, the main question is, ‘what does it mean for me?’ Grant Thornton’s analysis unpicks the detail to answer that question in the context of the government aims.  

A reduction in the top rate of tax 

For a second year in a row, there has been a change in the top rate of Income Tax. The top rate of tax has been reduced from 22% to 21% for the 2025/26 tax year. When the Income Tax rate rose from 20% to 22% in last year’s budget, it was introduced as a temporary, emergency measure. It appears this year’s reduction is a step towards the return of “normal” rates. 

Personal allowance increase

After remaining unchanged for 3 years, the Treasury Minister has increased the personal allowance by £250 for individuals to £14,750 (£29,500 for jointly assessed couples). This is a relatively modest increase for an allowance specifically highlighted in the Economic Policy Review Committee’s (“EPRC”) report as being of importance to working families.

The change will save individuals just over £50 per year in tax (jointly assessed couples £100).

An increase in the tax cap

The ‘tax cap’ election allows IOM resident individuals to cap the amount of income tax they pay. The amount payable under the cap has increased from £200,000 to £220,000. Under the minimum 5-year election, an individual would now be paying £100,000 extra in tax across the life of the cap.

The increase in the amount payable under the tax cap and the reduction headline rate of income tax have combined to notably increase the amount an individual would need to earn before a tax cap election is favorable.

Under 2024/25 rates, an individual needed to be earning approximately £910,000 per year for the tax cap election to be beneficial. Under 2025/26 rates, the election is now only beneficial if you are earning approximately £1,048,000.

Whilst the election will still be valuable for the highest earners it is slightly less valuable than in previous years.

Increases to the national insurance (“NI”) contribution thresholds

There were no changes announced to the rates of NI. The current Class 1 rates of 11% for employees (on earnings above the primary threshold) and 12.8% for employers remain. However, the Primary and Secondary Thresholds, the point at which both employees and employers start to pay Class 1 NI, will increase from £160 to £168 per week.  

The Upper Earnings Limit (the point at which an individual’s contributions drop to 1%) also increased from £938 to £1,032 per week from April 2025. This change will be beneficial for all employees who earn less than Upper Earnings Limit.

For the self-employed, the profits level at which Class 4 NI becomes payable increased in line with the Class 1 change to £168 per week and the Upper Profits Limit for Class 4 NI also increased to £1,032 per week 

There will be a minor increase in the Class 2 contribution from £6.20 per week to £6.45.

Increase to Island’s minimum wage 

Whilst not technically part of the budget, this change is being brought in throughout 2025 and seems worthy of a mention here. The change is being brought in via 2 increases to the minimum wage.  The changes will see the rate for adults increase by £1.60 per hour. 

The first increase set take effect from 1 April will see the rate rise to £12.25 and the second change due to take effect from 1 October will see that rate increase again to £13.05. 

Increases in benefits

As with all budgets there were changes to the rates of several benefits paid by the Government. The percentage up-rating applied to all the benefits can be found in table 26 of the budget. A few of the more significant changes are shown below:

• The Basic pension increased by 4.1% per triple lock.
• Maternity /adoption and paternity allowances have all been increased by 3.5%
• Winter Bonus payment increased from £350 to £400. 

Employer National Insurance rates unchanged

In the UK, the rate of employer national insurance was increased to 15% by Rachel Reeves in her budget in October. Given the close relationship between the UK and the IOM, Dr Alex Allinson must have considered the possibility of changing the IOM rate. 

However, he has decided to keep the Employer NI rate 12.8% which is positive news for the Island’s employers. Which combined with the slight increase to the Secondary threshold should slightly reduce the amount of employers NI payable.  

The Revenue sharing agreement

The Final Expenditure Revenue and Sharing Arrangement (“FERSA”) outlines what share of the VAT and shared duties pot the IOM will receive from the UK. FERSA requires surveys to be done every 5 years to determine how spending in the IOM differs to the UK. The first FERSA surveys were conducted in 2018/19 with the second surveys conducted in 2023-24.  

Surveys for 2023-24 have been completed but the FERSA calculations are not yet complete. As VAT and shared duties represent the largest section of the governments revenue, the results of this calculation will potentially impact the IOM projections. Businesses may want to keep an eye out for these results when they are announced.