28 October 2026
UK Chancellor John Healey has delivered a deliberately narrow but also lacklustre Budget, built around the cost of living rather than public finances, and structured as help now paid for later. The Chancellor had told colleagues he wanted the package to be “straightforward”, and he has largely kept to that: no change to the headline rates of income tax, National Insurance or VAT, and nothing approaching the scale of his predecessor’s two budgets.
However, the £23.6 billion of headroom he inherited from Rachel Reeves against the Treasury's own borrowing rules has been substantially eroded by the Iran war, which has kept Brent Crude near $116 a barrel and natural gas above 200p a therm, and by the higher debt interest costs that followed. Headroom now stands at £15 billion, expected to rise to £22 billion by 2031.
Rather than raise broad-based taxes, he has leaned on the architecture of the fiscal rules themselves, channelling £20.4 billion of additional capital into the National Wealth Fund and the British Business Bank. Because the assets those institutions create are offset against government liabilities, the extra borrowing is close to neutral for public sector net financial liabilities, the measure that must fall as a share of gross domestic product by 2029-30. It is entirely within the rules and so far, the gilt yields have not negatively reacted to it across the yield curve.
Markets had plenty of warning regarding the minimum wage settlement, the National Wealth Fund injection and the abolition of gas standing charges were all public before the Chancellor stood up.
The yield on the 10-year gilt, a reliable barometer of investor confidence, opened at 5.35% and had moved to 5.31% by the time of writing. At that level, it remains close to the highs of 2007, but the rise also owes to global forces. As reiterated by the Chancellor, the yields softened on the comments by the International Monetary Fund this month that the country "stands out" for its plans to cut its deficit. The FTSE 100 was trading up 0.2% by the end of the speech, with domestic Banks and Gambling companies benefitting from less than expected respective taxes and levies.
For UK companies, the landscape is little changed with corporation tax staying at 25% and the business measures are helpful at the margin. The more consequential question is the growth and inflation path published by the Office for Budget Responsibility ("OBR") within their economic and fiscal outlook. Economic growth was revised up earlier in the month to 1.2% on the back of stronger second quarter growth. The Chancellor expects the growth to slow next year (1%) before rising to 1.7% by 2030. The conflict in the Middle East has directly affected the inflation outlook through increased energy prices and indirectly through increased production and transportation costs. Inflation is forecast to peak at 3.8% in Quarter 1 2027 before returning to the 2% target by Quarter 3 2028.
Growth is heading the right way but from a low base and inflation has not yet peaked. The Budget reads as an attempt to protect the growth there is while taking the edge off the squeeze, which is why it rejects broad- based tax rises, loosens now and tightens later.
Energy bills: Standing charges are to be removed from household gas bills, the one measure confirmed before the Chancellor stood up. These fixed daily fees add around £108 a year to a typical gas bill and will be folded into the unit price instead, with Ofgem, the energy regulator, asked to deliver the change in 2027; the Treasury expects around 60% of households to save an average of £45 a year.
ISAs: The Chancellor has scrapped his predecessor's plan to cut the annual cash ISA allowance from £20,000 to £12,000 for the under 65s. It removes the complex anti-avoidance machinery that came with the proposal, including a mooted 22% charge on interest held within stocks and shares ISAs, and it protects a core funding source for building societies, which lend to first-time buyers off cash ISA deposits.
National living wage: The main adult rate of 21 years and over rises 3.9% from £12.71 to around £13.21 next April, the 18 to 20 year olds rate by the same percentage to around £11.27. Around 1.7 million jobs sit within 5p of the main rate, a real input cost for retail and hospitality.
Banks and Gambling: The Chancellor has raised the banking surcharge from 3% to 6% for 15 months, 1 January 2027 to 31 March 2028. The surcharge is levied on bank profits, so it falls hardest on the most profitable domestic lenders. The sector was expecting an increase to the surcharge, with the FTSE All-Share Banks index falling by 11.78% over the one month to yesterday's close, although shares in Banks increased on the chancellor’s announcement that he would raise taxes on the sector by less than expected and for only a limited period. The shares in UK gambling companies also rose as the tax levied on slot machines would rise by a smaller amount than many had feared.
Business Asset Disposal Relief and Founders’ Relief: The lifetime limit on gains qualifying for Business Asset Disposal Relief (“BADR”), which gives a reduced 18% capital gains tax rate, is halved from £1 million to £500,000 for disposals made from 6 April 2027. The Treasury's defence is that three quarters of claimants will still receive relief on their entire gain. Set alongside a new Capital Gains Tax Founders' Relief, offering a 10% rate on up to £10 million of lifetime gains.
HM Revenue & Customs powers: HM Revenue & Customs (“HMRC”) gains a new power to recover lower-value tax debts by taking regular instalments directly from the bank accounts of individuals and companies who can afford to pay but repeatedly fail to do so, from July 2029. This sits alongside, rather than replaces, the existing direct recovery regime, under which HMRC can already take money from an account where the debt is at least £1,000 and provided the taxpayer is left with £5,000 across their accounts. The new power therefore extends the reach of direct recovery below that £1,000 floor, while changing the mechanism from a one-off deduction to an instalment plan.
Property and savings income: Tax rates on property income rose by 2% from 6 April 2027, to 24% at the basic rate, 44% at the higher rate and 49% at the additional rate, applying across England, Wales and Northern Ireland. Savings income rates rise by the same two points to the same levels and apply across the whole UK. The Treasury presents this as progressive, saying around half the revenue is expected to come from the top 10% of households.
Devolution: The Fiscal Devolution Roadmap published alongside the Budget could provide the most significant long term positive change. Mayors would be able to retain a 20% share of locally retained business rates from April 2027, and the stated goal is for local and regional governments to keep 100% of business rates income before the end of the decade, with local authorities taking at least 70%. From 2028, mayors will also be assigned a share of the income tax raised in their area.
Bond markets remain the real arbiter. The United Kingdom now spends roughly one pound in every ten of government spending on debt interest, servicing rather than repaying debt of more than £2.7 trillion, and the tax take is forecast to reach a post-war high as a share of GDP before the decade is out. Raising £20.4 billion in a way that leaves the headline fiscal metric untouched is clever and entirely within the rules; whether gilt investors regard a metric that can be navigated this way as a binding constraint will show up in yields over months rather than in a single afternoon.
As so often, the hype has run ahead of the reality, partly because so much of this Budget was briefed on before the Chancellor reached the despatch box. What is left is a modest package that buys households breathing space through the winter and leaves the harder arithmetic for another day. For now, the world continues to turn.
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The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable indicator of future results.
The value of investments can fall as well as rise. Investors may get back less than invested.
