Budget 2026: Breathing Space Now, Big Decisions Later

Some Budgets simply adjust the dials. Others announce the arrival of a new government. Chancellor John Healey’s first Budget, following Andy Burnham’s arrival in Downing Street in July, had been billed as the moment the new administration would put real numbers behind its talk of “rewiring the state”. In the end, it was largely a Budget of incremental changes: some welcome relief on household bills, few nasty surprises, and the biggest decisions left for another day.

The economic backdrop remains challenging. Growth has proved more resilient than expected, but the conflict in the Middle East has pushed energy prices back up, inflation remains stubbornly above target and interest rates appear to be heading higher. Public debt is close to its highest level since the early 1960s, the government will spend an extra £14 billion on debt interest this year alone, and an ageing population continues to push up the cost of the State Pension, the NHS and social care.

Healey opted for targeted support rather than sweeping tax changes. Labour’s pledge not to raise Income Tax, employee National Insurance or VAT remains intact. The Chancellor offered what he called “breathing space” on the cost of living, funded largely by a higher tax on bank profits, alongside a long list of smaller measures. The harder questions around defence, welfare and public spending have been pushed back to next year’s Spending Review. Here is a summary of the key announcements that could affect your finances:

Economy

• Growth forecast nudged up for 2026. The OBR now expects growth of 1.2% this year, up from 1.1%.
• Growth downgraded for 2027. Next year’s forecast has been cut to 1% from 1.6%, before a recovery to 1.6% in 2028.
• Inflation to stay higher for longer. Inflation is forecast to average 3.1% this year and 3.4% in 2027, before returning to the 2% target in 2028.
• Borrowing to fall, but debt stays high. Borrowing is forecast to fall from 4.2% of GDP this year to 1.8% in 2030/31, but it is higher than previously expected in every year. Debt is expected to peak at 97% of GDP in 2028/29.
• Fiscal headroom shrinks. The Chancellor’s buffer against his fiscal rules falls to £15 billion in 2029/30, down from £24 billion in March.
• Tax burden heads for a new record. Tax is forecast to reach 37.9% of GDP in 2027/28, peaking at 38.6% in 2031/32.
• Living standards squeezed. Disposable income per person is forecast to grow by an average of just 0.1% a year over the decade to 2029/30.

Cost of Living

• £100 energy payment. Around 20 million households in council tax bands A to D in England will receive a one-off £100 payment directly into their bank accounts from January 2027. The devolved nations receive equivalent funding.
• Gas standing charges scrapped. Fixed daily charges on gas bills will move to the unit rate instead, saving around 60% of households an estimated £45 a year.
• Electricity VAT cut extended. The existing zero rate of VAT on household electricity has been extended until July 2027, worth around £50 off the annual price cap.
• Green levy removed from bills. A levy funding hydrogen projects moves from energy bills into general taxation.
• Import tariffs removed on food. Tariffs are scrapped on more than 100 products, including baked beans, chocolate and gherkins, saving households up to £21 a year.

Taxation

• No rises to headline tax rates. Income Tax, employee National Insurance and VAT rates are unchanged.
• Income Tax thresholds remain frozen. The freeze continues until April 2031, meaning an extra 6.8 million people will be paying Income Tax by 2031.
• Savings and property income tax rises go ahead. As previously announced, tax rates on savings and rental income rise by two percentage points from April 2027.
• Capital Gains Tax and dividend tax rates unchanged. Despite months of speculation, neither was increased.
• Business Asset Disposal Relief halved. The lifetime limit falls from £1 million to £500,000 from 6 April 2027, meaning up to £30,000 more tax for business owners selling up.
• New Founders’ Relief. From 6 April 2027, qualifying founders of high-growth companies will pay a 10% CGT rate on up to £10 million of lifetime gains. Eligibility criteria are strict and still subject to consultation.
• Trading allowance tripled. People can earn up to £3,000 a year tax-free from a side business from April 2027, up from £1,000.

Pensions & Investments

• Cash ISA cut reversed. The planned reduction to £12,000 for under-65s has been scrapped, so the Cash ISA allowance stays at £20,000 for everyone.
• State Pension to rise by 3.9%. The full new State Pension increases by £488 a year to £13,036 from April. The basic State Pension rises by £374.40.
• New Pension Tax Allowance. From April 2027, pensioners whose total income is no more than the full new State Pension will not pay Income Tax. Pensioners with higher incomes will still pay tax as normal.
• Tax-free pension lump sum unchanged. The maximum remains at £268,275, despite renewed speculation ahead of the Budget.
• Pensions Inheritance Tax change confirmed. As previously announced, most unused pension funds will fall within estates for Inheritance Tax from April 2027. The Budget adds a small refinement for charitable gifts.
• Salary sacrifice cap still on the way. The £2,000 cap on National Insurance-free pension contributions through salary sacrifice, announced last year, remains due from April 2029.
• New Starter ISA planned. The Treasury will work with the industry on a new ISA designed to reward first-time investors.

Wages & Benefits

• Minimum wage rises 3.9%. The National Living Wage and National Minimum Wage both increase by 3.9% in April 2027.
• Carer’s Allowance cliff edge removed. Carers earning over £204 a week after tax will no longer lose their entire allowance. A taper will apply instead.
• State Pension ‘triple lock’ reform. The previously announced changes to the triple lock from 2030 are expected to save £15 billion a year by the end of the 2030s.
• Welfare reform deferred. A white paper on reducing the welfare bill will follow before the end of 2027.

Housing & Property

• Your First Home scheme. A £4.7 billion government-backed equity loan scheme will help first-time buyers in England buy new-build homes with deposits from 2.5%. It is open to households earning less than £110,000, or £140,000 in London.
• First Time Buyer ISA. A new ISA will replace the Lifetime ISA from April 2029.
• Lifetime ISA penalty reduced. Holders buying a home above the £450,000 cap will pay a 20% withdrawal charge, down from 25%.
• £1 billion for social housing. The extra funding takes the 10-year social and affordable housing programme past £40 billion.

Devolution

• Business rates kept locally. All business rates will be retained locally by the end of the decade, with mayors keeping 20% from next year.
• Income Tax share for mayors. Mayors will receive a share of Income Tax receipts from 2028 and gain powers to introduce an overnight visitor levy on tourists.
• New regional funding. £285 million next year for housing, transport and high streets, plus a £1.5 billion borrowing facility for larger projects.

Government Spending

• Defence Investment Plan fully funded. The plan will be paid for through a further 1% cut to other departments’ capital budgets.
• Defence targets reaffirmed. The government reaffirmed its targets of 3% of GDP by 2030 and 3.5% by 2035, with the detail deferred to next year’s Spending Review.
• More support for Ukraine. An extra £10 billion of economic and military support for Ukraine.
• Investment in artificial intelligence (AI). More than £600 million for AI projects, including £120 million for the AI Security Institute and £100 million for a national AI Biosecurity Lab.

Business

• Bank tax doubled. The surcharge on bank profits rises from 3% to 6% for 15 months from January, helping to fund the energy support package.
• Business rates relief for the high street. The threshold for retail, hospitality and leisure businesses in England rises from £12,000 to £18,000, taking around 70,000 smaller firms out of business rates.
• Energy help for industry. 10,000 energy-intensive businesses will get 25% off their electricity bills from April.
• Online marketplaces to collect VAT. Platforms such as Amazon, eBay and Temu will become responsible for collecting VAT owed by their sellers.

Transport

• Fuel duty frozen again. The freeze extends to July 2027, and the 5p cut remains in place.
• Mileage allowance boosted. The 55p per mile tax-free rate for the first 10,000 business miles is made permanent, and the rate above 10,000 miles rises from 25p to 35p.
• Company car tax edges up. The benefit-in-kind rate for electric company cars is already due to rise from 4% today to 9% by 2029/30. The Budget confirms a further increase to 10% in 2030/31.

Healey promised a Budget that would do no harm, and by that modest yardstick he largely succeeded. Households get some genuine help with energy bills, savers have their Cash ISA allowance back, and the banks, rather than workers, foot most of the bill. Markets took it in their stride, with gilts edging slightly higher. Yet for all the measures announced, the overall fiscal picture has barely changed.

What was missing matters as much as what was included. After months of speculation, Capital Gains Tax and dividend tax rates were left alone, Inheritance Tax was largely untouched and the tax-free pension lump sum survived once again. That will come as a relief to many investors, retirees and business owners, though anyone planning to sell a business will feel the halving of Business Asset Disposal Relief. Nor should the quiet changes already in motion be overlooked. Frozen thresholds will keep drawing more people into tax, higher rates on savings and rental income arrive next April, and unused pensions enter the Inheritance Tax net at the same time.

The bigger decisions have simply been deferred. How to fund rearmament, rein in the welfare bill and pay for a National Care Service all wait for next year’s Spending Review. With headroom now down to £15 billion, the government has little room to manoeuvre if growth disappoints or inflation proves stubborn.

For most households, this Budget offers a modest reprieve rather than a turning point. It buys the Burnham government some breathing space, but not a long-term economic plan. The real test of its credibility will come with the decisions still to be made in 2027.

If you would like to talk about any of the issues in this article or need more general help with your finances, please get in touch with us.

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