On 28 October 2026, the British Chancellor John Healey announced the Labour government’s Autumn Budget. While most of the measures are technical or incremental in nature, the increase in taxes on banks coupled with the reduction in capital allowances reinforces a broader trend towards prioritizing short-term revenue generation over policies that encourage investment and support long-term growth.
Changes Affecting Business Taxation and the Cost of Capital
Perhaps the most economically significant changes in the budget concern business taxation and investment incentives.
Less Generous Capital Allowances
The budget reshapes capital allowances by reducing the main writing-down allowance from 14 percent to 12 percent, partially offset by an increase in the first-year allowance from 40 percent to 50 percent.
Last year’s budget already reduced the writing-down allowance (WDA) main rate to 14 percent from 18 percent, reducing the real value of deductions for assets in the main rate pool to 70 percent from 75.9 percent of investment costs.
For leased assets in the main rate pool that receive the first-year allowance, the change would raise the real value of deductions from 79.1 to 80.8 percent of investment costs. In contrast, for main rate pool assets without the first-year allowance—such as assets bought second-hand, leased overseas, or main pool cars—the real value of deductions will decline more significantly, from 70 to 62.2 percent. The overall effect is dominated by the latter, projected to raise an annual average of £871 million in revenue until 2031-32.
Generally, improving capital allowances is one of the most cost-effective taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy tools to encourage capital investment, as it directly reduces the cost of new capital investment simply by pulling deductions forward in time without giving up tax revenue from the returns on past investment.
In contrast, reducing capital allowances gives up capital investment and economic growth in the medium to long term for immediate revenue retention expected for the next three years. The Chancellor should therefore stay patient and consider reverting course, strengthening capital allowances for sustainable economic growth instead of reducing them for short-term fiscal gain.
Higher Corporation Tax on Banks
Another notable measure is the temporary increase in the bank surcharge from 3 percent to 6 percent, increasing the combined corporation tax and bank surcharge rate from 28 percent to 31 percent between January 2027 and March 2028.
While expected to generate around £1 billion of additional revenue, the measure will further increase the tax burden on a sector that already contributes over £12.3 billion annually through the corporation tax, bank surcharge, and bank levy. Higher taxes on banks may provide a short-term boost to public finances, but they also risk reducing the sector’s capacity to support lending, investment, and economic activity, while potentially undermining the UK’s competitiveness as a financial center.
Ideally, the financial sector should face the same rate of corporation tax as other sectors of the economy, allowing Britain to excel in its comparative advantages rather than steering economic activity elsewhere.
Allowing Mayors to Retain Part of the Revenue They Generate
From April 2027, mayors will retain a share of local business rates revenues and permanently keep 20 percent of future business rates growth in their areas. In return, part of their funding from central government grants will be reduced.
Devolving property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. revenues to local governments gives them a fiscal incentive to implement pro-growth policies that improve the local business climate. It also gives local governments an automatic mechanism to fund valuable public investments in local infrastructure that capitalize into higher business property values. Retaining a share of local income taxes lets governments compete for local residents.
Capital Gains TaxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. Relief for Founders
The budget also foresees a reduced 10 percent Capital Gains Tax (CGT) rate for qualifying disposals by founders or early investors of high-growth, innovative companies, subject to a lifetime limit of £10 million. To qualify, individuals must hold at least 25 percent of the company and meet a complex set of turnover, employment, growth, and innovation thresholds. While low CGT rates can encourage entrepreneurship and venture capital investment, a narrow scope defined by highly specific rules may reduce its effectiveness by creating legal uncertainty and increasing compliance costs.
Taxing Energy Production While Subsidizing Consumption
One notable change is the increase in the Electricity Generator Levy from 45 percent to 55 percent, which will remain in place until March 2028. The levy applies to revenues earned by electricity generators above a specified benchmark price, after accounting for eligible exclusions, exceptional costs, and annual allowances.
While the measure is expected to raise additional revenue from energy producers, it sits somewhat uneasily alongside the government’s temporary reduction in value-added tax (VAT) on domestic electricity bills from 5 percent to 0 percent between October 2026 and July 2027. On the one hand, policymakers are seeking to lower energy costs for households; on the other, they are increasing the tax burden on electricity generation, which may send mixed signals to investors in the energy sector.
Consumption Taxes and Household Support
The Autumn Budget includes several measures that will directly affect household consumption. One such change is the increase in the Machine Games Duty on higher-stake gaming machines from 20 percent to 25 percent, representing a targeted rise in the taxation of gambling activity and increasing the tax burden on households that participate in this form of leisure spending. By contrast, the budget reduces the overall tax burden on alcohol by expanding the small-producer alcohol duty relief and reducing the alcohol duty for beverages with low alcohol content, incentivizing the industry to shift to lower-strength products and small-scale production.
Alongside these tax changes, the government has announced a one-off £100 council tax rebate for more than 20 million households in council tax bands A to D in 2027. At an estimated fiscal cost of over £2.6 billion, this is one of the largest measures in the budget by expenditure. While the rebate provides short-term support to households facing cost-of-living pressures, it does not address the underlying shortcomings of the council tax system, which remains based on property valuations dating back to 1991. As a result, the measure only offers temporary relief rather than tackling longer-term concerns about the fairness and efficiency of local property taxation.
Changes to the Taxation of Savings
The budget contains a mixture of positive and negative changes for savers. Most notably, the budget reverses the previously announced reduction in the Cash ISA annual allowance. Instead of reducing the limit from £20,000 to £12,000 for individuals under 65 from April 2027, the government maintains the £20,000 allowance. Additionally, the withdrawal penalty for Lifetime ISA holders purchasing properties above the £450,000 threshold will be reduced from 25 percent to 20 percent starting in October 2026.
However, these positive developments are accompanied by tax increases. From April 2027, tax rates on savings and property income will rise by a further two percentage points across all bands.
Table 1. Tax Rates on Savings and Property Income
| Savings Rates | Tax Year 2026 to 2027 | Tax Year 2027 to 2028 |
|---|---|---|
| Starting rate for savings | 0% | 0% |
| Savings basic rate | 20% | 24% |
| Savings higher rate | 40% | 44% |
| Savings additional rate | 45% | 49% |
From 6 April 2027 to 5 April 2030, a new pension tax allowance removes income tax for pensioners whose total income does not exceed the full new State Pension, at an annual cost of £50 million from 2027-28. It is worth 20 percent of the gap between the State Pension and the personal allowance and is withdrawn at £1 for every £3 of income above the State Pension, weakening work incentives for pensioners.
International Trade
One of the more encouraging aspects of the budget is its treatment of international trade. The budget suspends tariffs on 72 products from August 2026 and extends suspensions for 361 products through 2027-28. Additional tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. relief applies to food products, fertilizer, kerosene used for heating oil, and various business inputs.
The import tariff suspensions are projected to relieve consumers by a volume of £60 million and businesses by a volume of £145 million in tariff burdens annually until 2028-29.
However, the government also plans to remove the £135 customs duty relief threshold for commercial transactions and introduce new customs arrangements from October 2028, expected to raise only £215 million in the fiscal year 2028-29, with prospective revenues turning slightly negative by 2030.
Avoiding Tough Decisions
The 2026 Autumn Budget prioritizes fiscal consolidation largely through tax increases while simultaneously offering a range of temporary household support measures. Although some policies, like extending tariff suspensions and increasing fiscal devolution, move in a positive direction, they are outweighed by measures that raise the cost of investment and capital formation. This budget avoids addressing several longstanding structural weaknesses in the UK’s tax system. Rather than relying primarily on higher taxes and temporary rebates, the government should focus on spending restraints and pro-growth tax reform. Priorities should include improving capital allowances for buildings and structures, broadening the VAT base while lowering rates where possible. A future budget should also return to the Prime Minister’s own pro-growth ideas, such as replacing the Stamp Duty Land Tax with annual property or land taxes.
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