A Budget Focused on Providing ‘Breathing Space’
John Healey introduced his first Budget with the aim of offering much-needed ‘breathing space’ to individuals and businesses facing ongoing financial pressures across the UK. The Chancellor highlighted the impact of international uncertainty, referring to global challenges such as the continuing war in Ukraine and conflict in the Middle East, which have contributed to rising costs for households and businesses alike.
Given the limited scope for additional government spending, substantial tax reductions and financial incentives were largely anticipated to be absent. Nevertheless, the Chancellor emphasised the UK’s comparatively strong economic position among G7 nations and underlined the importance of supporting entrepreneurship to encourage sustainable growth and long-term economic success.
Energy costs continue to be a significant concern for households. In response, the Chancellor announced a £100 Household Energy Payment for eligible households in England within council tax bands A to D. Following the announcement, the GOV.UK council tax band checker experienced a surge in demand and temporarily became unavailable. Additionally, the temporary 5p reduction in VAT on household energy bills will remain in place until July 2027.
Entrepreneurs and business owners are expected to benefit from the introduction of a new ‘founder’s relief’. This measure will apply a 10% Capital Gains Tax rate to qualifying gains of up to £10 million on shares in innovative companies, subject to specific eligibility criteria, including a minimum 25% shareholding. However, this benefit is accompanied by a reduction in Business Asset Disposal Relief, with the lifetime limit for qualifying gains falling from £1 million to £500,000.
In June 2026, the government published a consultation document proposing changes to the taxation of company distributions and capital repayments. A further technical consultation is planned, with updated legislation expected to come into effect on 6 April 2028. The proposals will particularly address arrangements in which shareholders withdraw accumulated company profits as capital without a genuine commercial justification. An example would be transferring shares in exchange for loan notes issued by a newly established holding company.
Although the Chancellor may face criticism for a lack of bold measures in his first Budget, particularly given the absence of a major unexpected announcement, the Budget contains numerous changes requiring careful consideration. The following sections outline the principal announcements and their implications for individuals and businesses.
Personal Taxes
Income Tax and National Insurance
Income Tax thresholds: In keeping with the Government’s manifesto commitments, the Chancellor has ruled out increasing the rates of Income Tax and National Insurance.
Pension Tax Allowance: A new allowance will protect pensioners on lower incomes from Income Tax, increasing their tax-free threshold to £13,036.40 to align it with the uprated State Pension.
Income Tax Self-Assessment (ITSA): A significant change will affect individuals receiving a combination of employment income and profits from self-employment or property rentals. From April 2029, tax payments will be collected more frequently throughout the year.
National Minimum Wage: From April 2026, the hourly minimum wage for workers aged 21 and over will increase from £12.71 to £13.20. Workers aged between 18 and 20 will receive an increased rate of £11.27 per hour.
Property and Savings Income
An additional 2% Income Tax increase on property and savings income will take effect from 6 April 2027, alongside the 2% increase previously announced in the 2025 Budget. Consequently, the applicable Income Tax rates on savings and property income will rise to 24%, 44% and 49%.
Dividend Tax Rates
The Income Tax rates applicable to dividend income will remain unchanged.
Paternity Leave
Self-employed individuals will become eligible for paid paternity leave, extending support to those working for themselves.
Individual Savings Accounts (ISAs)
A new Starter ISA will be introduced to encourage first-time investors to begin investing.
A First-Time Buyer ISA will replace the existing Lifetime ISA.
The annual contribution limit for Cash ISAs will remain at £20,000.
Capital Gains Tax
Capital Gains Tax Reliefs
Founder’s Relief: A new relief will be introduced to support entrepreneurs by applying a 10% Capital Gains Tax rate to qualifying gains of up to £10 million over an individual’s lifetime. It will be available to shareholders holding at least 25% of a qualifying trading company, provided the company has a turnover of at least £10 million in the year preceding the disposal and the shares have been held for a minimum of five years.
Business Asset Disposal Relief: From 6 April 2027, the lifetime limit for qualifying gains eligible for Business Asset Disposal Relief will be reduced to £500,000, with the applicable Capital Gains Tax rate increasing to 18%.
Businesses
Capital Expenditure
The first-year allowance available for qualifying capital expenditure will increase from 40% to 50% from 1 January 2027. However, the writing-down allowance applicable to existing expenditure will decrease from 14% to 12% from April 2027.
Business Mileage Rates
The approved business mileage rate for the first 10,000 miles will remain at 55p per mile. For mileage exceeding this threshold, the rate will increase from 25p to 35p per mile.
Business Rates
Local authorities will retain 100% of business rates revenue by the end of the decade.
Mayors will receive 20% of business rates revenue. From 2028, they will also receive a proportion of Income Tax revenue.
Business Rates Relief
Small business rates relief for businesses operating in the retail, hospitality and leisure sectors will increase from £12,000 to £18,000. This change is expected to remove approximately 70,000 businesses from business rates liabilities.
Annual Tax on Enveloped Dwellings (ATED)
The Annual Tax on Enveloped Dwellings, which applies to companies owning UK residential properties valued at more than £500,000, will increase by 3.5% for the 2027/28 tax year.
Starting a Business and New Ventures
The tax-free trading allowance will increase threefold, from £1,000 to £3,000, with the new limit taking effect from 6 April 2027.
Employee Share Schemes
From 6 April 2027, the maximum value of share options that can be granted under the Company Share Option Plan (CSOP) will increase to £120,000. This change will expand the scheme’s scope, making it more comparable to the Enterprise Management Incentives (EMI) scheme.
Making Tax Digital (MTD) for Income Tax
The Government has announced adjustments to the implementation of Making Tax Digital for Income Tax. These include temporary relaxations to penalties and delays to the introduction of the requirements for certain taxpayer groups.
Individuals entering the MTD system from April 2027 will not receive penalty points for late submission of their first four quarterly updates during the 2027/28 tax year.
Other Tax Measures
Value Added Tax (VAT)
Household energy: The temporary reduction in VAT on household electricity bills will be extended until July 2027, providing an estimated average saving of £50 against the energy price cap.
Online traders: New enforcement powers will be introduced to tackle online traders who fail to register for tax when required.
Taxi companies: VAT regulations affecting larger taxi operators will be strengthened to prevent businesses based overseas from avoiding their UK tax obligations.
Land for social housing: Land supplied to social housing providers will become VAT-free, extending the existing relief available to housing associations.
VAT and PAYE payments: From April 2029, taxpayers will be required to establish Direct Debit arrangements to pay their VAT and PAYE liabilities.
Energy and Fuel
Gas standing charges: The Government intends to remove standing charges for gas through reforms involving Ofgem, with comparable changes to electricity bills expected to follow.
Household energy support: Eligible households in council tax bands A to D in England will receive a £100 payment directly into their bank accounts to help alleviate rising energy costs.
Fuel duty: The temporary reductions in fuel duty will be extended until July 2027.
