Few Surprises: Leaks and Trial Balloons Likely Mute the Market Effects of Britain’s Tax Shifts

Editors’ Note: MarketMinder Europe is politically agnostic. We prefer no party nor any politician and assess developments for their potential economic and market implications only.

At last, the UK Budget is out. Chancellor of the Exchequer Rachel Reeves has opened her red briefcase, unveilled its contents and ended the prolonged uncertainty over what, exactly is in it.

Opening it revealed a lot: a hodge podge of stealth and non-stealth tax hikes, plus some modest relief that didn’t get nearly as much attention in the commentary we read. Surveying headlines from publications that lean left and right politically, the reaction appeared universally negative, yet the FTSE 100 finished the day up nicely.^[i] That doesn’t automatically mean this Budget is some whopping positive, but we think it strongly hints months’ of leaks—capped off by the Office for Budget Responsibility’s (OBR’s) releasing its analysis of the Budget pre-speech—seemingly sapped the negative surprise power.

As all the coverage we read points out, this Budget does raise the UK’s tax burden to the tune of £26 billion by fiscal 2029 – 2030.^[ii] This figure isn’t arbitrary: The UK’s fiscal rules require the government to run a projected budget surplus within five years, based on the OBR’s forecasts. So every year, as forecasts evolve, governments from both parties have tended to tweak taxes and spending to keep five-year projections in check.

We think it is fair to say no one likes paying higher taxes. But our research finds stocks generally don’t deal in what people like and dislike. We find they zero in on corporate earnings and how those are likely to fare over the next 3 – 30 months. If the Budget included a tax change that was a) surprising and b) likely to cause UK corporations’ earnings to be worse than investors project, then we think that could have negative market implications. But a Budget whose many, many tax provisions largely match expectations lacks that surprise power, which we find generally saps its market influence even as it creates winners and losers.

We think this Budget is the latter. It creates winners and losers, but we think the latter were already widely known thanks to all the Treasury’s trial balloons and public speculation, which was apparent across the wide-ranging discussion in several commentary outlets in recent months. That includes the major individual tax provisions, which we summarise here from the published Budget.

• Income tax bands will remain frozen an additional three years, through 2030 – 2031, dragging more people into the Higher Rate (40%) and Additional Rate (45%) bands as inflation lifts incomes.
• Basic and Higher dividend tax rates will rise 2 percentage points (ppts), to 10.75% and 35.75%, effective April 2026.
• Taxes on property and savings income will also rise 2 ppts, to 22% (Basic), 42% (Higher) and 47% (Additional), effective April 2027.
• Pre-tax contributions to salary sacrifice pension plans will have a cap on their tax relief. Contributions over £2,000 annually will be subject to National Insurance Contribution (NIC) charges from April 2029.
• Properties valued over £2 million will get hit with a “high value council tax surcharge,” effective April 2028.
• Cash Individual Savings Account (ISA) annual contributions will be capped at £12,000, but total ISA (including stocks and shares ISAs) contribution limits will remain at £20,000, effective April 2027.

What isn’t here: income or capital gains tax rate hikes, a so-called exit tax on wealthy people who leave the country, a wealth tax or any of the large changes that we observed generating more fear this year. The ISA changes appear aimed at incentivising stock investment, which may have some silver linings for markets and, potentially, British investors. So whilst the higher burden on households is notable, and we don’t dismiss the pinch many will feel, it isn’t surprisingly higher. We see an argument that it is smaller than feared, which we find is often all stocks, which we find are cold-hearted, need to get over the hump.

Business-related provisions were also light on surprises … and included some underappreciated relief.

• Capital gains tax relief for company owners who sell their business to employee ownership trusts will drop from 100% to 50%, effective immediately (once the Budget is passed).
• The tax deduction for capital spending will drop from 18% to 14%, effective April 2026.
• Companies will be able to write off more of their up-front investment costs, with an allowance of 40% in the first year, effective January 2026.
• Business rates will drop for retail, leisure and hospitality businesses, offering relief to about 750,000 establishments, whilst rates will rise for large warehouses worth more than £500,000, effective April 2026.
• The energy windfall profits tax will shift to a 35% tax rate when oil prices exceed $90 per barrel, effective April 2030.

Here, too, we see winners and losers. The business rates changes are a noteworthy example, aiming to shift more of the burden from brick-and-mortar retail to e-commerce, addressing one of the high street’s long-running frustrations. The energy windfall profits tax will get a little less draconian, whilst business investment tax incentives will shift. But we saw no major, unexpected increases.

So from a broad stock market perspective, we don’t think this Budget is a massive negative. It lacks surprise power, and its market-related scope doesn’t look huge to us. Higher dividend tax rates sting, but dividends aren’t corporations’ only means of returning cash to shareholders. Stock buybacks are another option. Perhaps this Budget incentivises more of that. And as for corporate earnings, a lot of the UK’s publicly traded companies do business globally, which generally saps local taxes’ importance to the bottom line. Yes, we domestic economic drivers matter to local stock returns, but economic records show the UK has a long history of tax hikes, both stealth and outright … and a long history of achieving economic growth despite this.

Thee vast majority of fiscal policy changes create winners and losers. It is tempting to try to tally these up and weigh them against each other. But absent sweeping, unexpected change, we think markets tend to care more about whether a budget lowers uncertainty. For now, we see a strong likelihood investors will get a break from all the speculation about potential changes. Everyone knows what they will be dealing with, which can enable markets to move on.

Even if the tax system isn’t what households and businesses might consider ideal, we find knowing the lay of the land is a powerful thing. Businesses can do the maths, calculate rates of return, and deploy investment. Households can do the same, adjusting their ISA contributions and making other personal finance changes as they deem wise and relevant to their needs and situation. There will be time to parse through all of that, as many of these provisions take effect at a delay. We find planning and anticipation often have a way of being mitigation. The scope of these tax changes is aimed at giving the government sufficient headroom between OBR forecasts and its finances to forestall constant talk of hiking this or that, stirring uncertainty. Hopefully, that holds true.

If this ends up being the last monumental Budget for a while, so much the better, in our view. We think a constantly shifting tax code benefits no one—it can make it harder to plan and take risk. Time will tell on that front. But for now, we think having the Budget at last gives investors clarity, which lets everyone breathe a sigh of relief.