On 26 November, the Chancellor of the Exchequer, Rachel Reeves, presented The Budget Bail, the annual national economic plan, to Parliament. The plan covers taxes, spending, welfare policies, and more. It has a significant impact on public and market sentiment. This is especially important as it is one of the key UK releases that investors closely monitor.
The plan comes amid a difficult time for the UK economy. A struggling labour market, rampant inflation, and limited growth have stifled the country’s economic outlook. The million-pound question is whether The Budget Bail does enough to support the UK’s recovery.
Conclusions on this are mixed. The plan includes measures aimed at strengthening struggling areas of the economy, particularly the challenging labour environment for young people. However, some argue that these measures are not sufficient. Controversial decisions, such as prolonging the freeze on personal income tax thresholds, have caused a stir. Some critics even accuse Reeves of misleading the public during the build-up to The Budget.
However, such a wide-spanning financial plan will inevitably spark disagreements. Different points of view will clash, and political bickering will likely intensify. This article aims to cut through the noise and present the facts. It will also explore what this new policy may mean for UK traders and those trading UK-based instruments.
Tax Policy in The Budget Bail
As noted earlier, The Budget Bail includes a personal income tax threshold freeze. In other words, the limits at which people start paying taxes and move into higher tax brackets will remain the same.
Fiscal Drag Explained under The Budget Bail
While this may sound like tentatively positive news on the surface, in the sense that things won’t get worse, it is likely to result in people moving into higher tax brackets. As inflation grows, wages tend to follow, and this is particularly notable in the UK, where the government hasn’t succeeded in battling inflation, with the number exceeding 4% in the past period, compared to the 2% goal.
Thus, if both inflation and earnings grow at the same rate while tax thresholds remain unchanged, people will naturally progress into higher brackets as time goes on. This phenomenon is called fiscal drag. It means that spending power won’t increase as bigger inflation eats away at growing earnings, while people end up paying more in taxes.
Savings and Investment Taxation Adjustments
On the savings side, dividend income, savings income, and property income are to increase by 2 percentage points from 2027/28. Of course, this directly affects landlords, investors who earn dividends, and those who earn heavily from savings or investments. This is a part of Reeves’ plan for those with the broadest shoulders to take the largest part of the burden.
Pension Contribution Reform: Salary Sacrifice Limits
Another significant change is the limitation of pension contributions via salary sacrifice to £2,000. Both employers and employees will need to pay NICs on higher contributions. This reduces a tax benefit many employees already use, but it’s worth noting that lawmakers considered it a loophole.
Economic Impact & Outlook of The Budget Bail
This makes the situation look grim, as tax increases often do. However, the silver lining is that these measures will increase the government’s spending ability and potentially start to rehabilitate the economy. Additionally, the following measures aim to ease some of the pressure that additional taxation will create.
Cost Regulation and Benefits in The Budget Bail
While taxes remain frozen, so do some fares. Transport and prescription fees will remain the same, which will make some costs less noticeable as inflation rises. Additionally, the already active fuel duty freeze continues, further stabilising transport costs. However, EV owners get the short end of the stick with a new mileage tax starting 2028/29. 3p per mile for electric cars and 1.5p for plug-in hybrid vehicles, with the government estimating that this will bring in £1.1bn in the first year.
Reeves has also made changes to energy costs. The Treasury will cover a segment of the cost of the Renewables Obligation. For the average household, this equates to a £88 per year discount. It will also discontinue the Energy Company Obligation (ECO), further saving £59. Finally, due to both of these measures, VAT will fall by £7. This translates to roughly £150 less per year in energy spending.
Furthermore, pensions will get a straight-up increase in 2026, with the state pension growing 4.8%. Along with that, the national minimum wage gets a similar increase of around 4.1%. This, paired with some other benefits, like the removal of the two-child benefit cap and welfare payment increases, may ease cost-of-living pressure.
On the labour side, Reeves has announced a £820m funding plan to help guarantee paid work placements for young people. This measure seeks to reduce the number of young people not in education, employment, or training, a group that makes up an alarmingly high portion of the UK’s youth.
Business Measures
While the business side remains relatively unaffected, there is some tightening in capital allowances, along with a new 40% first-year allowance encouraging early investment.
Along with this, the FCA will apply increased pressure, with higher fees for late tax filing and stricter tax rules.
Some measures will also be placed to help struggling sectors. Business rate relief targeting retail, hospitality, leisure, and creative sectors is planned, in the hopes of limiting steep price increases.
Finally, Reeves has announced incentives to boost investment in SMEs and scale-ups.
Possible Impact and Market Reactions
While some argue that the plan goes against Reeves’ promises and worry about very limited growth potential and higher public spending, others laud it as a solid, future-facing plan. Altogether, it’s difficult to accurately predict the long-term impact of such a wide-spanning plan, but the primary aim is reducing inflation, with a projected 0.4% decrease in the first year.
Despite the mixed reactions, market participants seem to have reacted positively to The Budget Bail. When the plan was released, the GBP strengthened against multiple other currencies, including USD, JPY, and CHF. Additionally, the FTSE 100, the primary index used as a benchmark for UK company performance, has expanded, despite company taxation and regulation somewhat tightening.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
