David Ellis
Partner, Head of Strategic Reward Advisor
Chancellor John Healey’s first Budget on 28 October will carry a heavy weight of expectation from both his party and Prime Minister Andy Burnham, who is in a hurry to deliver ‘real change’ for voters. Businesses and individuals will also be hoping for help with the costs of doing business and rising household costs. But will the international economic headwinds have calmed by the autumn giving him a window of opportunity for positive policy moves?
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Jon Hickman - Corporate Tax Partner & BDO Budget lead
Nina Skero, Chief Executive, Centre for Economics and Business Research
Updated 18 August 2026
Barely settled into his new role, Chancellor John Healey already faces a crucial Budget, planned for 28 October. His task of balancing the country’s books is made somewhat easier by the fact that the UK economy has shown some resilience in 2026 thus far. The factors making his job harder are more numerous and include a lacklustre outlook for the second half of the year, fallout from the conflict in the Middle East, and a long list of unfunded spending pledges that the Prime Minister has already announced.
GDP grew by a healthy 0.4% in the second quarter of 2026, following an expansion of 0.6% in the first three months of the year. However, this momentum may be difficult to maintain. Looking ahead, energy price volatility is set to supress real household incomes, weighing on economic activity. Cebr forecasts modest annual growth of 1.2% for 2026 as a whole, well below the long-term trend.
At Budget 2025, the then Chancellor would have been justifiably hopeful that we were near the beginning of a Bank of England interest rate easing cycle. However, the escalation of conflict in the Middle East since February has pushed up global energy prices, creating inflationary pressure and taking rate cuts off the table for the foreseeable future. This combination of events will have shrunk the Office for Budget Responsibility’s (OBR’s) estimates of the Chancellor’s ‘fiscal headroom’, that is, the buffer between the government’s spending plans and their self-imposed fiscal rules.
Chipping away further at this buffer are the range of smaller announcements the Prime Minister has made since taking office in July, including removing VAT on domestic electricity bills and a £2 cap on bus fares. He has also talked about overhauling the social care system and, more generally, about “giving people some breathing space” on the cost of living.
All of this leaves us in a familiar spot – wondering how the government will fund its ambitions.
A part of the answer may lie in what Andy Burnham has referred to as sticking to existing fiscal rules while using "flexibility" within them. There has been speculation that the government is considering using a mechanism which allows spending on public sector assets to be offset against the cost of borrowing, possibly creating £9 billion a year for spending by 2031. It is a technical fix, made possible by a change to the Treasury’s fiscal rules introduced by Rachel Reeves last year, that could unlock genuine investment, but it relying on it risks looking like moving the goalposts to suit the government’s ambitions, which financial markets may not judge favourably.
Trimming spending will also be on the table. The Prime Minister has signalled that some benefits, including mental health-related support, will become conditional on claimants taking up work. The nature of the welfare reforms that have been signalled sound limited and are therefore likely to add up to less than the fiscal arithmetic requires.
That points, once again, towards tax rises. This would be Labour’s third tax-raising Budget in as many years, following the £41.5 billion package in 2024 and £26 billion in November 2025. With the ‘big three’ taxes still off the table, Chancellor Healey will be forced to look elsewhere for a broad-based package of increases.
Talk of equalising capital gains tax with income tax has seemingly quieted down. This leaves pension tax relief as the most-discussed lever that has never quite been pulled – see below.
To limit the scale of tax rises, the Chancellor will also seek to announce pro-growth reforms, or at least measures the OBR is willing to score as such. Two policy areas with genuine upside are devolution, especially if local decisionmakers are incentivised by getting to retain more of locally generated revenues, and increased housebuilding. There is a question of timing, however, as the OBR may take the view that any fiscal benefits of such measures only materialise in outer forecast years.
Funding Andy Burnham’s early promises and longer-term ambitions while keeping the fiscal framework intact leaves little margin for error. With debt at 95% of GDP and borrowing costs at their highest in decades the stakes could not be any higher. We will all be watching closely as Chancellor Healey works to convince the markets, and the public, that the sums add up.
More local spending
As well as rumours are that the Government plans to spend £9bn on regional funding projects. Devolving spending decisions to local mayors, another decentralising measure would be to boost the funding for local authority building of council housing, although the economic impact may be relatively small before the next election. Scaling up production will be difficult to achieve due to planning delays and materials shortages.
Defence spending increase
As the former Defence Minister, the Chancellor knows all too well just how much is required to bring the UK’s military forces up to date – even funding the Starmer Government’s military spending plans (which Healey himself described as inadequate) will be highly challenging. While he was perhaps a clever appointment as Chancellor by Andy Burnham, a spending compromise seems inevitable without a truly radical shift on tax policies.
Cost of living support
The Government has already announced the removal of VAT from domestic electricity charges from 1 October, so an equivalent reduction of VAT on domestic gas would be a welcome and eye-catching measure. Another VAT reduction that would be popular with both families and businesses would be to introduce a lower rate of VAT (perhaps 10%) on all hospitality (with the possible exception of alcohol) – following on from the Summer VAT savings scheme for children. This would echo the recent 9% rate created in Ireland and since the Budget is in late October, the change could be implemented before Christmas.
On a similar theme, the Chancellor might introduce a reduced rate of VAT on outdoor Electric Vehicle charging (again perhaps a 10% rate). However, while it is unlikely that other fuel duties will go up, a cut may not be affordable.
It is not likely that the main rate of VAT will be cut, but it is possible an increase in the VAT registration threshold from £90,000 to £100,000 might be included to help small businesses.
The Prime Minister has previously floated the idea of increasing the income tax personal allowance, which has been frozen for many years to collect more tax through fiscal drag. However, even a modest £500 increase in the allowance is estimated to cost £5bn a year, which is probably why this idea seems to have been sidelined.
Specific measures targeting young taxpayers, like cutting income tax or employee NIC for three years for those entering work for the first time would prove popular, and give a clear incentive to young people not in employment education of training ( ‘NEETs’) to take up employment. Such changes may give employers a larger pool of young job applicants to choose from, so could increase employment and be seen as pro-growth, but it would be unlikely to solve the UK’s ‘low productivity’ issues.
The Government intends to expand business rates relief to help reduce costs for small business including as a 20% cut for hospitality businesses such as clubs, music venues, pubs etc, instead increasing the rates paid by large warehouses. This would make a significant difference to individual businesses and protect some employment, and would provide support to certain high street shops, something again the government appears to support.
How might the Budget raise money?
Of course, the cost of all these measures combined adds up to tens of billions very quickly. This makes it difficult for the Chancellor to balance the Budget as he has promised, and the markets expect. Despite initially raising the idea of a 50% top income tax rate, Andy Burnham subsequently committed to Labour’s General Election manifesto promises about maintaining the current rates of the main revenue raising taxes on individuals - income tax, NIC and VAT.
So, are there any quick wins for the Chancellor?
a) Soft targets for revenue raising
Banks are traditionally a target for higher taxes from many in the Labour party. Most commentators are predicting that they will face significant tax increases, or even some form of windfall tax. The current combined corporation tax rate for bank profits is 28% but a return to 31% (the high after the pandemic) is quite possible.
Every Chancellor uses the handy shortfall filler of “anti-avoidance” measures and higher investment in HMRC to raise tax revenue in the future. Given the heavy focus on this in the last decade, there is bound to come a point of diminishing returns, where the revenue gains predicted become unrealistic. Regardless, we can expect to see some established tax practices and reliefs come under review, perhaps including:
So-called ‘sin taxes’ on alcohol, tobacco, sugary drinks and vaping fluid have increased markedly in recent years, so on cost-of-living grounds alone, these may prove harder to raise significant revenue from this year.
b) Wealth taxes
Taxes on personal wealth have been much discussed and many in the Labour party support the idea of a straightforward wealth tax. Critics of a wealth tax often cite the failure of other jurisdictions to make it work and it is often described as a voluntary tax because there is a fear that it would lead to the wealthy leaving the UK – even if coupled with an exit tax. .
Other taxes on wealth might prove better at raising revenue. Since Labour came into power, there has been annual speculation that the rate of capital gains tax will rise, and many Labour MPs support the idea. However, the Treasury’s economic modelling suggests that significant increases in the CGT rate actually reduce the overall revenue collected, because owners simply retain assets showing large paper gains, rather than trade them in and pay tax. Anecdotal evidence suggests that some owners are holding on to gain-rich assets until the next General Election in the hope that a change of Government will bring lower CGT rates.
As always, a small increase in the rates is unlikely to have much immediate impact on CGT revenues but could send the political signals the Chancellor wants to convey. Of course, any increase in rates announce for a future date, eg from April 2027 onwards, might raise useful additional revenue in the short term if enough sellers rush to beat the deadline for the rate increase.
With the political pain of the April 2026 IHT changes for farmers and business owners fresh in MPs’ minds and more controversy over the IHT on pensions changes from April 2027, this year’s Budget might not be a great time to change IHT again. However, the Prime Minister has said he is prepared to spend some ‘political capital’ to get a ‘national care service’ up and running, and some form of tax on death has been mooted as a way to fund it. Whether a suggested flat rate of 10% tax on assets held at death (without a nil rate band) would collect sufficient tax and be acceptable to voters will require some OBR number crunching and an expertly delivered Chancellor’s speech on Budget Day. Any new measure would inevitably have to come with complex anti-avoidance rules – including some reform of the lifetime gifting rules and a fresh look at base cost uplift on death where reliefs apply. The High Value Council Tax Surcharge is already set to take effect in 2028, so adding yet another tax that would inevitably feed into the property taxes mix might undermine confidence in the housing market. As this is such a sensitive area, and given that Baroness Casey’s independent commission on adult social care is not due to report until 2027 (even on an advanced timetable), tax moves to fund its recommendations may simply be delayed until a future Budget.
The perennial tax question over individuals’ pension tax-free cash entitlements will no doubt continue to be discussed despite the topic not being mentioned in Budget 2025, as will the ever-rising cost of providing reliefs to encourage pension saving. However, the uproar caused by Rachel Reeves announcing a capping of pension salary sacrifice arrangements from 2029, demonstrates that just a small change to pensions can cause lots of political heat. For this reason, major changes to pensions in Budget 2026 are an outside chance – although the idea of adding a small % tax charge on to pension fund management fees remains a relatively simple and easy to implement option for a brave Chancellor.
c) Land value tax
The idea of replacing both Stamp Duty Land Tax and Council Tax with an annual land value tax has many supporters as it is seen as less distortive to the property market than SDLT, and, if it replaced SDLT, would remove the upfront cost of getting onto the property ladder. On the negative side, it would be difficult to implement quickly, valuations would be disputed and it would tax the ‘asset rich’ but ‘cash-poor’ (often the elderly), hardest of all.
The Government is already consulting on a wide range of administrative and policy changes and although many of them will help to raise revenue or advance tax payments, this will only materialise over the longer term and the amounts raised may prove to be relatively small.
For example, it might seem counter intuitive that making an exemption mandatory would raise tax revenue, but HMRC’s proposals to make the foreign permanent establishment exemption mandatory could reduce the use of overseas losses by UK groups and therefore increase the corporation tax take.
But perhaps a more eye-catching example is the consultation on timely payment of income tax, which proposes advancing the current tax payment schedule for all self-assessment taxpayers from 2029. HMRC will be hoping that another consultation focusing on ways to collect small tax debts should also help to limit the ever-larger tax gap. Another consultation on HMRC creating an explicit “duty to correct” errors in tax returns could offer another tool to help bring down tax arrears in small businesses.
Similarly, modernising the reporting rules on loans to company participators should lead to more reporting and therefore higher tax revenues. Another consultation on aligning the tax rules for corporate distributions so that funds extracted from a company in different ways have a similar tax treatment will hopefully lead to clarity on capital gains v income tax treatment on distributions, and the suspicion is that this could be used to raise revenue too.
For employers, an update on changes to the way PAYE Settlement Agreements operate and on tougher rules for holiday pay enforcement will be significant, and there is also the possibility that yet more changes to the payrolling of benefits in kind from 2027 will be announced.
The Budget is also expected to include updates on a new mileage charging system for EVs through an updated Vehicle Excise Duty, which should help to replace the revenue lost through lower fuel duties as more drivers adopt EVs.
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