John Healey reassures markets for now with modest package of tax and spending changes in his first Budget.
John Healey delivered a low-key maiden Budget as chancellor on 28 October 2026 asserting it was built on ‘fiscal discipline’ and ‘fiscal credibility’ for the benefit of the ‘working people of Britain, for British businesses big and small.’ He stated his tax and spending plans were designed to give households and businesses ‘breathing space’ today against a backdrop of ‘global economic storms’ and cost of living pressures.
UK Economy
The chancellor reported that GDP growth forecasts for the UK economy have been upgraded slightly for 2026 to 1.2%, but 2027 GDP growth was downgraded from 1.6% to just 1% as a result of global pressures. Growth is now forecast to range between 1.6% and 1.8% in 2028-2030.
Inflation is forecast to peak above 4% in 2027 as higher oil and gas prices feed into the UK economy; this is double the Bank of England’s inflation target of 2%. These growth and inflation forecasts result in what the OBR called a ‘pretty grim picture’ for British living standards with a reduction in real disposable household income of 0.6% in 2026 and a rise of just 0.2% in 2027. The squeeze on UK consumers is likely to be heightened with the expectation that interest rates will increase in the coming months to help calm inflation. Mortgage rates are likely to remain elevated for the foreseeable future too.
The UK’s borrowing costs have significantly increased by £14bn since spring 2026 and total debt interest is anticipated to reach £160bn by 2031. The chancellor partly covered this higher interest bill by reducing the UK’s medium-term borrowing limit or headroom to £15bn, which was in-line with market expectations.
Total government debt is anticipated to reach 83.8% GDP in 2027 before gradually reducing. Public sector borrowing is forecast to reduce gradually from 4.2% GDP in 2026 to 1.8% in 2030/31.
Overall, whilst in the short-term the UK economy has performed somewhat better than expected as a result of business investment and AI productivity improvements, this resilience is being undermined by global inflationary pressures which are a consequence of volatile geopolitics. The UK government has decided to prioritise more spending and borrowing in the short-term to provide a targeted ‘breathing space’ to certain groups, while postponing difficult decisions on further tax rises or spending cuts until closer to 2030.
Budget Measures – Personal Finance
As expected, and in accordance with the Labour Party’s manifesto, there were no changes to the headline rates of Income tax on earnings/pensions, National Insurance, VAT or Corporation tax. There was also no increase to the Income tax on dividends. Inheritance tax (IHT) and pensions were both in focus before the Budget, but both these areas remain unchanged, including no change to tax relief on pension contributions and no change to pension tax-free cash.
However, Income tax on savings and property rental income was increased by a further 2% to 24% basic rate, 44% higher rate and 49% additional rate from April 2027. This increased Income tax on savings will apply not only to bank/building society interest, but also chargeable events on investment bonds. Landlords are expected to pay £2bn more tax over the next 5 years and savers £2.4bn more tax.
Whilst the headline rates of Capital gains tax (CGT) were left unchanged at 18% basic rate and 24% higher/additional rate with £3,000 annual exemption, Business Asset Disposal Relief (BADR), formerly known as Entrepreneur’s Relief was further restricted with a reduction in the lifetime limit from £1m to £500k from April 2027. This could result in an extra £30k CGT for a business owner selling a business.
A new Founder’s Relief from CGT was announced from April 2027 – this will give qualifying founders a CGT rate of 10% on up to £10m of qualifying lifetime gains. Whilst a generous tax break to encourage entrepreneurship in the UK, the qualifying conditions are very onerous, including £10m+ turnover and demanding growth or R&D tests (25% pa growth over 3 consecutive years; £1.5m+ spent on R&D), so in practice the typical smaller owner-managed business in the UK is unlikely to qualify.
Self-Assessment from April 2029: Income tax Self-Assessment taxpayers will have to make regular ‘in-year’ payments towards their annual tax bills rather than just pay tax twice each year in January and July. HMRC will clarify more details on how this will operate in 2027 with new digital tools in 2028.
ISAs: The proposal to reduce the Cash ISA from £20,000 to £12,000 for those under age 65 was scrapped. So, the annual ISA subscription limit remains at £20,000 for all investors and savers irrespective of a preference for a Stocks & shares ISA or Cash ISA. The tax charge on Stocks & shares ISAs holding cash has also been abandoned.
The government plans to consult on a new ‘Starter ISA’ to reward first-time investors.
A new First Time Buyer ISA will launch in April 2029 to replace the Lifetime ISA (LISA) for new savers. A bonus of 25% will apply on savings up to £20,000 on a first home of up to £450,000. Existing LISAs will continue and where a first home is purchased costing over £450,000, the withdrawal charge drops from 25% to 20%, so whilst the government bonus is forfeited, there is no penalty applied to an investor’s own savings.
First-time buyers who qualify may benefit from a new Government 20% equity loan for the purchase of a first home.
Pensioners who receive only a State pension which exceeds the Personal Allowance will not pay any tax from April 2027 as a result of a new Pension Tax Allowance. This new Pension Tax Allowance will be available for pensioners with other income too up to £13,319. For income falling between the Personal Allowance of £12,570 and £13,036 (a full State pension from April 2027), the Pension Tax Allowance will taper by £1 for every £3 income.
Subject to the outcome of the next general election, from 2030 the ‘triple lock’ on the State pension will become a ‘double lock’ indexed by the greater of 2.5% or inflation (CPI), but the earnings link will be removed. This is expected to result in significant cost savings which the government proposes to spend on new social care support.
Budget Measures – Business Finance
Banks will pay significantly more tax with an increase from 3% to 6% for 15 months from January 2027 to March 2028 in the Bank Corporation Tax Surcharge raising £1.5bn. Gambling taxes will also increase.
The Trading Allowance will increase from £1,000 to £3,000 pa from April 2027 to benefit individuals starting micro businesses or earning additional income alongside their main employment.
The National Living Wage and National Minimum Wage will increase by 3.9% from April 2027, main rate rising to £13.21 per hour.
The tax-free mileage rate for using a privately owned vehicle for business has been confirmed it will remain at £0.55 per mile up to 10k miles pa (£0.45 previously, £0.55 now as a temporary measure), then £0.35 per mile over 10k miles pa (an increase from £0.25 now). The £0.05 fuel duty cut has been extended to July 2027.
Tax-advantaged employee share ownership in growth businesses has been enhanced with EMI2 (Enterprise Management Initiative 2) doubling the value of tax-advantaged share options to £120,000 from April 2027.
Capital allowances have been reformed – the First-Year Allowance will increase from 40% to 50% from January 2027, but the main writing-down allowance will reduce from 14% to 12% from April 2027.
Small businesses in the retail, hospitality and leisure sectors will benefit from business rates support at up to £21,000 rateable value from £15,000 now.
Tax Changes announced previously
Whilst the reforms outlined in this Budget were modest, it should be remembered that Rachel Reeves’ previous Budgets announced some very large tax increases totalling approx. £66bn including the changes below:
Tax thresholds frozen until 2030/31: this so-called ‘fiscal drag’ means that everyone pays more tax as inflation results in increases in income but there is no corresponding increase in tax or National Insurance thresholds.
Income tax on savings and rental income: It was previously announced a 2% surcharge over Income tax on earnings. In today’s Budget, a further 2% surcharge was added.
National Insurance: employer’s National Insurance increased to 15% with the threshold cut from £9,100 to £5,000.
CGT annual exemption: frozen at £3,000 until April 2031 resulting in more CGT on the sale of assets, such as shares and second homes.
CGT rates: increased to 18% basic rate and 24% higher rate tax.
Inheritance tax (IHT): The Nil rate band of £325,000 and Residence nil rate band of £175,000 are frozen until April 2031 increasing the potential IHT liability for all estates as asset values increase over time.
Mileage tax on electrical vehicles: Due to start in April 2028 at £0.03 per mile on electrical vehicles and £0.015 per mile on plug-in hybrid vehicles.
Pensions subject to Inheritance tax (IHT): From 6 April 2027 the value of private pensions will be aggregated with an estate and subject to IHT on death. There will remain no IHT on transfers between spouses or civil partners on first death.
Pension salary sacrifice cap: £2,000 annual cap on pension salary sacrifice arrangements without triggering National Insurance.
Our View
The chancellor aimed to reassure markets with a relatively cautious and uneventful Budget. To this extent, the Budget was a success – both government borrowing costs and sterling money markets were unmoved which is most welcome.
However, the challenges for the UK economy remain – growth and productivity are low, the overall UK tax burden is at its highest level since 1945, and government spending and government debt are all too high. Britain’s national debt is forecast to reach £3.7tn in 2031/32, an increase of nearly 25% in 5 years having only recently reached hit £3tn.
The perception is increasingly that too many individuals of working age are in receipt of sickness benefits when they could be working, whilst business and workers are excessively taxed and regulated, and savers are punished for their thrift. The OBR estimates the total welfare bill will rise from £333bn in 2025 to £431bn by 2031/32 (approx. £210bn pensions, £120bn sickness and disability benefits). The 2031/32 estimate has been increased by £8bn since the last projection. The chancellor indicated the government would revert in 2027 with proposals to reduce the welfare bill but there was no detail at this stage.
Our concern is that the fiscal consolidation required to balance the books, ie. spending cuts and/or further tax rises estimated at £20-35bn, will fall close to the likely date of the next general election in 2030 (unless Mr Burnham decides to call an early general election). From a political perspective, fiscal consolidation close to a general election would be undesirable for any government, so the concern is that the can is likely to be kicked down the road.
Indeed, the IFS recently commented that the government’s plans to rely on incredibly tight public service spending trajectories that will slow down sharply will make them difficult to maintain. In particular, it is yet to be announced how 3% of GDP will be spent on defence by 2030 estimated at £11bn. Other than defence and health, the squeeze on other government departments is estimated by the IFS at £20bn+ (eg. Education, justice and local government) by 2030 and it is unclear how this shortfall will be met.
Finally, the reduced headroom of £15bn from around £23bn after today’s Budget is regarded as adequate but at the lower level to deal with future shocks. This is important as geopolitics remain volatile, so this reduced headroom leaves the UK vulnerable to global shocks.
Financial Planning Opportunities
We look forward to discussing potential financial planning opportunities with our clients. In particular, this Budget has highlighted certain issues:
ISAs: With tax on savings increasing further, the value of ISAs which grow free of both Income tax and CGT is enhanced. Accordingly, maximum use should be made of ISA allowances each year.
Pensions: Income tax relief on pension contributions and tax-free growth in a pension remain invaluable tax breaks.
Tax allowances: Full use should be made of personal tax allowances, such as the Personal allowance, basic rate tax band, starting rate band, Personal savings allowance, Dividend allowance and CGT annual exemption.
Company for property ownership: For many landlords owning rental properties in a company rather than personally may be tax advantageous, especially with the increase in Income tax announced on rental income.
Investment bonds: these should be reviewed to ascertain if a chargeable event is appropriate before April 2027 to ensure tax is levied at current rates before the extra 2% tax increase.
Self-Assessment from April 2029: this will need careful monitoring to understand the new rules and requirements. The requirement to make multiple tax payments each year for Income tax will result in more onerous obligations for taxpayers with income not taxed at source.
As always, my team and I are pleased to provide further information and advice as required on a personal basis. Matthew Clark, 28 October 2026.
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