Here’s our immediate response to today’s Budget.
We’ve also updated our tax calculator so it shows the impact of the Budget. But, in short, you won’t see a change unless you’re a pensioner on low income, a landlord, or someone receiving interest outside an ISA. And the only very significant impact will be on people with large amounts of rental or non-ISA interest income.
The big picture
Two things are true: this Budget put up tax only a small amount, and tax is continuing to rise significantly. The pandemic left us with much more government debt, which has become much more expensive to service, and significantly increased health and disability benefit costs. That, plus weak economic growth, means successive Chancellors have chosen to put up tax.
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Or, as a percentage of GDP:
So by 2030/31 we will be paying £123bn more tax (in today’s money) than we would have done if there had been no tax changes since 2021. About two-fifths of that comes from Conservative Budgets, the effect of which is now baked in. Most of the rest comes from Starmer/Reeves Budgets. Only about £6bn comes from today’s Budget.
The Budget changes
In the short term there is almost no net increase in tax. In 2027/28, the tax measures almost cancel out, adding only about £0.7bn:
More significant increases phase in over time – £19bn in real terms over six years (but that is a small sum in comparison with the UK’s approximately £3,000bn GDP).
All of this is back-loaded. The savings and property rise brings in just £160m next year but £1.1bn in 2028/29, and the “Tax gap (HMRC)” money only arrives from 2029/30:
If we put all this together, and look at the total effect, in 2026/27 prices, of each Budget measure over the forecast period:
The headline tax increases
There are three headline tax increases:
Bank tax
The biggest single measure in the short term is the temporary bank surcharge. That raises about £1.5bn over fifteen months – then it ends. We discussed last week that there was some scope for an increase in bank tax if it was relatively modest and temporary – that appears to be what’s happened. It leaves the overall effective tax rate for our notional investment bank as follows:
Savers and landlords
John Healey repeated Rachel Reeves’s focus on savings and property income, putting it up by another two points from April 2027. That’s on top of last year’s two, so the rates will be 24%, 44% and 49%. This also raises about £1bn but, unlike the bank tax increase, it will be permanent.
The government says “84% of income tax payers will be unaffected”. That will be true if we’re just looking at the taxpayers directly affected. However, there will be wider indirect effects. The OBR thinks it’s “more likely than not” that this increase, in conjunction with other recent changes, pushes up rents in the long run.
Writing-down allowance
Jeremy Hunt introduced full expensing – a 100% up-front tax deduction for investment in qualifying plant and machinery. There’s good reason to believe full expensing can help drive investment and growth.
Investment that doesn’t qualify for full expensing (plant bought for leasing, second-hand assets, cars) kept the old treatment: a “writing-down allowance” of 18% a year on the reducing balance.
Labour under Keir Starmer and Rachel Reeves kept full expensing, but cut the writing-down allowance from 18% to 14%. At the same time they introduced a new 40% “first-year allowance” for new investment that doesn’t get full expensing. This Budget does both again: the writing-down allowance falls to 12% from April 2027, and the first-year allowance rises to 50% from January 2027.
The Red Book is candid as to the reason for this:
So what’s the overall effect?
For new investment that gets full expensing, nothing changes.
For new investment that gets the first-year allowance, it’s actually slightly more generous than before: on our rough numbers the tax relief is worth 85% of the cost, up from 84%, and more than the 82% it was worth before Labour’s changes.
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The losers are second-hand assets and cars, and investment that has already been made: the 12% rate also applies to the balances already sitting in businesses’ capital allowance pools. For those, the relief falls from 77% to 74% of the cost.
That probably makes it less damaging to growth than the headline suggests. Slowing down relief on investment that’s already been made raises money without changing anyone’s decision about what to build or buy next (unless people expect the same to happen again; which they might!).
The investment that is discouraged, at the margin, is in second-hand plant and cars, and for businesses spending less than £1m a year even the second-hand plant is covered by the annual investment allowance. And a lower writing-down allowance defers relief rather than denying it.
All of this raises, net, about £1bn a year in the medium term. So you can see it as a funny kind of tax on businesses that previously invested in certain types of investment.
Pension tax
The Government promised that pensioners wouldn’t pay additional tax as a result of the State Pension exceeding the personal allowance. There was lots of speculation as to how this could be achieved.
The actual mechanism turns out to be a three year tax reduction of up to £94 a year for anyone over State Pension age whose total income is no more than the full new State Pension (£13,036.40 in 2027/28). There’s then a taper which withdraws that tax reduction at £1 for every £3 above that. (See Overview of tax legislation and rates, para 1.4.)
It’s not irrational to want to prevent pensioners being chased by HMRC for £93. But the complexity looks disproportionate. Each pound of income in the £282 withdrawal band costs 20p of tax plus 33p of lost allowance, meaning a 53% marginal rate for pensioners on about £13,000. Given this is only over a £94 tax reduction, it’s unlikely to change behaviour, so it can’t be compared with the child benefit and personal allowance tapers, which are extremely distortive. It just feels disproportionate: a new relief, a new taper and a new 53% band, for £94.
Other changes
The other significant measures, roughly in order of how much they raise:
Foreign sovereigns
Over the last 20 years, a huge amount of investment has been made in the UK by foreign governments and their sovereign wealth funds.
These investments have almost always been exempt. The basis for that has always been somewhat unsatisfactory – an unwritten/common law rule that effectively results in the UK giving a much more generous treatment to such investors than most other countries. As a recent consultation document said, “The current regime is not codified and is based on principles of international law that HMRC have interpreted through administrative practice”. That’s a murky and arguable basis for billions of pounds of tax-free investment.
From 2029 that exemption goes onto a statutory footing, and their UK property income and gains come into tax. I view that as a good thing – giving a large commercial advantage to some investors was always very hard to justify.
Foreign branches
UK companies with foreign branches can currently choose whether to exempt them from UK tax. Profitable branches tend to opt in; loss-making ones stay out, so their losses can reduce UK profits.
From January 2027 the exemption becomes mandatory: foreign branch profits are exempt, and foreign branch losses can’t be used in the UK. That raises about £0.5bn a year.
I expect this will disappoint some banks, as they (unsurprisingly) rather like having loss-making foreign branches that subsidise their UK operations. But it’s right in principle. The UK doesn’t tax the profits of foreign subsidiaries or give relief for their losses, and there’s no good reason why branches should be treated differently, still less that companies should be able to choose. Giving taxpayers the ability to opt for different tax treatments is not, generally speaking, a great approach. It’s becomes a bit “heads I win, tails you lose”.
More to follow later
Photo of John Healey and Andy Burnham Crown copyright, CC BY-NC-ND 4.0