The OBR expects taxes as a percentage of GDP to increase to an all-time high of 38% in 2030-31.
The Bank of England should have more confidence now that inflation is slowing. We expect a cut in December and two or three more in 2026.
We expect households and businesses to spend and invest more in 2026 despite — not because of — the Budget.
Finally, the wait is over. Chancellor Rachel Reeves has delivered her second Budget. Here we lay out the key measures we think are important and what it means for investors today.
Over the last two years, there have been rumours that the tax-free lump sum that pension savers could withdraw would be curtailed or abolished. However, this Budget limited any major changes to pension taxation to salary sacrifice, meaning the tax-free lump sum and the rates of tax relief on pension contributions remain unchanged.
Many people of pension age had accelerated their tax-free withdrawal in the last couple of years on the back of these rumours. The latest data we have from HMRC show that cash withdrawals from pensions rose from an average of £8 billion per year1 to £11 billion in the 2023-2024 tax year to £18 billion in the 2024-2025 tax year.
What those pensioners do with that cash could be economically meaningful. Some of it will be gifted no doubt to some lucky children and grandchildren — and that could be spent, used to paydown debt, or perhaps invested.
Thus far, much of that cash appears to have made its way into cash ISAs2. Higher cash balances mean that pensioners have earnt a smaller return on their savings than they may have made had it been invested in stocks.
With the cash ISA limit now reduced to £12,000 a year (for those aged below 65), and the tax rate on income from savings increased by 2 percentage points, there’s now a question of whether those who have previously maxed-out their cash ISAs every year will switch some of those savings into investments. Nearly 1.5 million savers used the full £20,000 ISA allowance by saving cash in the 22-23 tax year.3
Set against this is the Chancellor’s proposal to limit the exemption from employer and employee National Insurance Contributions for pensions salary sacrifice above a £2,000 a year limit. At a time when the pensions industry — and the newly-launched Pensions Commission — is increasingly focused on adequacy in retirement, the Chancellor has continued the unfortunate trend of subjecting pensions savers to short-term tax changes.
Nonetheless, due to the available tax relief, pensions remain a highly attractive savings vehicle for investors.
Cutting the cost of living was one of the Chancellor’s three key themes in this Budget, alongside cutting NHS waiting lists and cutting the debt.
With the energy price cap due to rise slightly from January exerting a little pressure on households, the Chancellor pledged to cut average household energy bills by £150 from April next year, principally by funding 75% of the domestic share of the Renewables Obligation from the Exchequer for three years.
In addition, Reeves maintained the freeze in fuel duty and the previous administration’s 5p cut until the end of August next year, after which the cut will be reversed in phases over the following six months.
Similarly, some rail fares in England have been frozen for a year from March 2026, at a cost to the Exchequer next year of £145 million.
Given the Labour Party’s position in the polls and recent speculation about the Prime Minister’s longevity in office, the primary audience for this Budget was the Parliamentary Labour Party. Overall, through scrapping the two-child limit on child benefit and announcing a range of tax increases that can be portrayed as hitting those on higher incomes or with higher levels of household wealth, the Chancellor has done enough to please her colleagues and avoid the political disaster that would have ensued had she chosen to break the Labour Manifesto commitment and raise the rates of income tax.
However, the chaotic run-up to the Budget and the continued lack of an enduring government narrative mean that Sir Keir Starmer and his Chancellor remain in a precarious position. The final Budget package may have bought them a little goodwill on the backbenches, but it won’t fundamentally change their colleagues’ assessment of their chances at the next general election under the current leadership. As such, the local and national elections in May remain a major danger point for the Prime Minister. If, as expected, Labour sustain significant losses in England, Scotland, and Wales, a leadership challenge may ensue.
From an investment perspective, the outcome of the Budget doesn’t change much in our view.
Markets initially appear to have given Reeves the benefit of the doubt and displayed a sense of calm despite the farcical start to the afternoon whereby the OBR released its report early before the Chancellor had spoken.
This was always going to be a disinflationary Budget, one that was not designed to stimulate strong growth. Households and business are facing higher taxes. But the tax increases don’t appear immediately while things like energy relief will come through more quickly. More importantly though the private sector is resilient. It has been deleveraging for several years while fears of higher mortgage rates and a desire for precautionary savings have led UK households to build large cash balances.
Mortgage rates have been falling and should continue to move lower in 2026. Households and businesses now have a little more clarity on the fiscal backdrop, even if many don’t like what they are seeing. Certainty is better than uncertainty, and UK households should have a little more confidence to spend and invest over the coming year.
Businesses are facing higher labour costs via higher minimum wages. But at least more certainty now and the 4.1% increase in the minimum wage will likely be seen as more acceptable to businesses after recent years’ inflation-busting increases, which were badly hit by the National Insurance hikes last year. Those businesses that have held back on hiring new workers may now restart their hiring processes.
We believe there is pent up demand in the UK economy and are confident that UK growth will improve a little in 2026 compared to 2025, despite, not because of, the actions the UK government has taken.
The Budget is a little less contractionary than some feared given income tax rates were left untouched. But it is still deflationary, and with recent inflationary trends already showing less pressure, the Bank of England can now be expected to resume its cutting cycle. We expect the BoE to cut in December and marginally more in 2026 than is currently priced by money markets.
That should mean mortgage rates fall more quickly and new rates move below outstanding rates. The mortgage squeeze UK households have experienced in recent years should start to ease, allowing households to become a bit more willing to spend.
High government debt and political flip-flopping have weighed on UK gilts this year. We believe this Budget has provided enough to ease those fears a little. With yields in the UK higher than many other developed markets and the Bank of England now having more reasons to cut, we think that gilt yields across the curve will fall.
Further the Debt Management Office further reduced the value of gilts to be issued at the long end of the curve and cancelled all the remaining 30yr auctions for this fiscal year.
Our fixed income team view the UK as one of the best places to take duration risk today.
The removal of some policy and political uncertainty removes some of the headwinds to the UK pound. It has strengthened a little since Reeves’s speech. But we think it is likely to weaken a little over the coming months — especially against the euro — as policy rates and bond yields come lower.
If growth surprises more positively in 2026, as we expect, then the pound could start to rebound.
The FTSE 100, with its international exposure and sector mix, has outperformed in 2025, buoyed by foreign inflows and buybacks. In contrast, the FTSE 250 and other domestic indices lag, reflecting investor caution on UK growth and fiscal risks. Domestic investors have been net sellers of UK equities, with high savings rates and risk aversion prevailing. At the margin, lower cash ISA allowance may encourage some to invest rather than save. Although, let’s be honest, it is the over-65s that have most of the cash and still the larger cash ISA allowance.
Compared to other regional equity markets, UK stocks are still trading on lower multiples meaning there is still far less optimism priced into UK domestic share prices.
Talking to our UK equity teams they see plenty of opportunities in the UK today and share our view that the private sector backdrop is far less bad than many suggest. UK banks remain a favoured area, for example. They escaped a possible bank tax during this budget. Food retailers moved higher on Wednesday, likely in response to removing the de minimis rule on no VAT being charged onto small sum imports.
The Budget is not pleasant for many, it is not a budget for growth, but it is not Armageddon and it changes very little in the way we think about investing today. Rather, this budget clears some of the uncertainty we think has been holding back household spending and investing, and UK corporate investing and hiring.
Quoting Reeves’s first Budget. “Invest, invest, invest”. We see good reasons for investing in UK stocks and gilts today.
We offer a variety of ETFs and funds that maybe used to gain exposure to different parts of the UK bond and equity market.
As economies show resilience, selectivity and care remain critical for bond investors figuring out where to take duration risk and how to think about returns.
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