Written by:
Alex Chappell
Head of Investments at Amber River DB Wood
Positively, (though as we expected), Chancellor Healey produced a dull budget, restricted by the UK's fiscal tightrope.
I’m not sure whether I wake up on Budget Day being nervous or excited. There is something quite significant about the biggest annual fiscal event of the year, and in the background always a bit of hope that the people in charge will make decisions that will improve the country’s opportunity set. Perhaps this Wednesday though the emotional balance was tilted towards nerves over excitement, mainly given the recent budget experience which brought about the two biggest tax rises in recent history back-to-back.
To be fair, this budget was always going to be a tough tightrope to walk. The new Labour Government have to both satisfy the left side of their party and the bond market. The former want to spend and the latter has, for some time now, been saying you can’t as we simply don’t have the economic growth to support it. Simple maths really.
Positively, (though as we expected), Chancellor Healey produced a dull budget, restricted by the UK’s fiscal tightrope. Thankfully he didn’t rock any of the major boats, (such as Capital Gains Tax), though instead he made some small giveaways, in between some well-intended commentary, and some tax increases on savers and landlords.
Energy Bills & Cost of Living:
- 20 million households in council tax bands A to D will get a new £100 energy payment to support them through the winter
- The standing charge on gas bills for 23 million homes will be scrapped (estimated to save £45 per annum on average) plus an extension to the VAT cut on domestic energy costs
- The National Living Wage is set to rise by 3.9% from £12.71 per hour to £13.21 per hour for all aged 21 and over, and National Minimum Wage from £10.85 to £11.27 for those aged 18-20
Savings, Investments & Pensions:
- The proposed reduction of the Cash ISA limit to £12,000 per annum has been reversed, and a new Starter ISA is to be announced to encourage young people to invest
- The tax on savings interest and property income will be increased by a further 2%, meaning that basic rate taxpayers are now paying 24% and higher rate 44%
- The State Pension will also rise by 3.9% as per the Triple Lock guarantee
- The penalty on withdrawing money from a Lifetime ISA will be removed, subject to certain criteria yet to be clarified
Businesses:
- Banks will face an additional profit surcharge of 3% for 15 months from January. This was less extreme than many feared and bank shares reacted positively
- Business Rates thresholds for retail, hospitality and leisure businesses will increase, exempting 50% of businesses in those sectors from paying any business rates. There are more details to come as there are restrictions on certain properties and trading activities
- A new Young Entrepreneur’s Allowance was announced, aimed at supporting young founders in the early stages of building a business
- The Business Asset Disposal Relief lifetime limit is set to fall from £1 million to £500,000 from 6 April 2027. Eligibility and transaction timing will be important for affected business owners
- At the same time a new Founders Relief is to be introduced which will grant a Capital Gains Rate of 10% on up to £10m for the founders of qualifying, highly innovative companies. What the qualifying criteria is for this benefit will be announced further down the line
- Gambling levies will be increased from 20% to 25%
If markets had emotions, ‘relief’ would probably be the best way to describe the reaction.
Macroeconomic Outlook & Spending:
- GDP forecasts were updated to 1.2% for 2026 and 1.0% in 2027
- The Defence Investment Plan that aims to increase defence spend as a percentage of GDP to 2.7% for 2027-2028 was fully funded
- A number of smaller measures were announced to support energy infrastructure, data centre projects and AI investment
- Promises were made to reshape the eligibility for certain welfare benefits and better promote people getting back to work
Our initial reaction is that this budget was exactly what it needed to be – non-controversial. As is always the case, there will be winners and losers, with banks, landlords and those with large non-ISA savings targeted, to provide room to provide energy support, tailored business initiatives and rises to the State Pension and National Living Wage.
We will see how markets absorb the news over the coming days, but the initial reaction of bond markets is marginally positive, as some of the risk premium that was priced into bond markets unwound. If markets had emotions, ‘relief’ would probably be the best way to describe the reaction.
For clients, the big picture doesn’t change a lot. We still have the most restrictive and challenging tax landscape we can remember, which requires careful and tailored planning to navigate. This government were never going to be able to change that in one hit and must hope that economic growth will provide a cushion to support further spending over the next twelve months. In its absence, we have more tax rises to come.
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