Aug 12, 2025
Reforming rates: Capital Gains Tax and Carried Interest
Key takeaways
- The Budget prioritised market confidence over a fiscal reset, preserving fiscal rules and headline Income Tax, National Insurance and VAT rates. With headroom reduced to £15 billion, new spending remained modest and time-limited, while targeted taxes -principally a temporary increase in the bank surcharge - funded lasting measures.
- The Budget met market expectations for fiscal restraint, keeping the UK out of the spotlight on European fiscal concerns. The reaction was muted: gilts slightly outperformed peers across maturities, while sterling gained marginal support against the US dollar.
- The Budget offers little near-term support for growth. An external energy shock, persistent inflation and the prospect of higher interest rates keep stagflationary risks in view, while longer-term challenges around debt, productivity and spending remain unresolved.
- Support for entrepreneurs is targeted rather than broad-based: a proposed Founders’ Relief would offer a 10% Capital Gains Tax (CGT) rate on the first £10 million of qualifying gains, and tax favoured employee share options would expand. Alongside this, the BADR lifetime limit falls to £500,000 from 6 April 2027; Founders’ Relief remains subject to consultation, legislation and stringent eligibility conditions.
- Investors and savers face higher taxes despite unchanged headline rates on working and dividend income. From 6 April 2027, basic and higher rates on savings and property income rise by a further two percentage points in addition to the increase already announced in 2025, with the top rate reaching 49%; the annual cash ISA subscription limit remains £20,000.
The first Budget of Andy Burnham's premiership, and the first delivered by Chancellor John Healey, opted for continuity over reinvention: fiscal rules intact, headroom under scrutiny and markets watching closely. It was the new government's first real opportunity to set out its economic agenda. In the lead-up to the event, Burnham's public engagements had signalled an intent to ease cost-of-living pressures and pursue devolution (with the state positioned as a catalyst for private investment), while also repeatedly emphasising fiscal restraint.
On balance, the Budget was emblematic of an inherited set of constraints. An energy shock linked to the Middle East has pushed costs higher, the Bank of England has moved from debating cuts to weighing hikes, and gilt yields have climbed to levels last seen decades ago. Much of the fiscal buffer present at the start of the year has been eroded. That seems to have driven the decision to deliver a package that could reassure both markets and voters, keeping any new spending modest and time-limited, while leaning on tax rather than borrowing to fund lasting measures. More ambitious and costly parts of Burnham's agenda seem to have been held back.
A focus on continuity
The pressure in bond markets has been notable. Long-dated yields had climbed through the summer and autumn, alongside a global repricing of government debt. The 30-year gilt yield breached 6% earlier in October — its highest since 1998 — and the 10-year closed at around 5.30% on the eve of the Budget. That left elevated yields and questions about debt sustainability hanging over the event, with a push for a more disciplined fiscal package.
Against this backdrop, the Budget upheld fiscal rules. It is still intended to balance by 2029–30, debt is forecast to fall as a share of the economy, and the push for one fiscal event a year is intact. Manifesto pledges remain unchanged as the Chancellor reaffirmed the government’s commitment to not raise headline rates of Income Tax, National Insurance, or VAT — leaving a narrow set of ways to raise additional money. Healey had already ruled out a higher Capital Gains Tax, warning it could cost rather than raise revenue if the wealthy deferred disposals or left the country. Talk of a lower high-value council tax threshold didn't come to fruition, and elsewhere, the tax package was small and targeted, with the bulk of immediate revenue coming from a temporary higher corporation tax on bank profits.
Higher borrowing costs took a sizeable bite out of the fiscal buffer — eroding around £11 billion of headroom — while stronger tax receipts clawed some of that back. On net, that left the final fiscal headroom at £15 billion, well short of the roughly £30 billion contingency typical before the pandemic. Borrowing was revised slightly higher all the same, but the deficit is expected to decrease to 3.4% of GDP in the next fiscal year.
Hard choices were deferred to next year, with some larger spending decisions left unaddressed. And even on this path, the OBR sees the tax burden climbing to around 39% of GDP by 2031–32, an all-time high and more than seven percentage points above pre-pandemic levels.
A delicate economic balance
The U.K. economy has held up better than expected despite high energy prices and higher rates. But we don't see a meaningful near-term growth boost from the Budget, given the limited scope for fiscal stimulus.
The OBR trimmed its growth path, cutting 2027 to 1.0% from 1.6%, with later years little changed. Before the conflict, inflation had been on course to settle near the Bank of England's 2% target, yet headline CPI rose to a 3.5% annual pace in September from 3.1% in August, its highest since October 2025, and core inflation was an elevated 2.8%. The OBR forecasts CPI at 3.1% in 2026 and 3.4% in 2027, back to target in 2030. Meanwhile, the labour market looks firm: unemployment fell to 4.7% in the three months to August from 4.9% earlier in the summer, with employment rising. The OBR sees it peaking at 5.1% before settling a percentage point lower in the longer run, leaving little slack to pull prices back down on its own.
That affects the Bank of England's policy path. A year ago, the debate was how fast the Bank could cut; in February, the MPC came within one vote of easing to 3.5%. Since then, the Bank Rate has been held at 3.75% at every meeting, dissents have turned more hawkish, and markets now price over 100bps of hikes by the end of next year.
Altogether, the Chancellor faces limited fiscal space. An external energy shock and sticky services inflation keep stagflation risks in view. Longer term, structural challenges remain unresolved, with hard choices still ahead.
Key tax announcements
The measures outlined below combine targeted support for high-growth businesses and employee share ownership with reduced relief for other qualifying business disposals and higher taxes on savings and property income. Alongside these changes, plans for fiscal devolution would give regional authorities a greater role in raising and allocating revenue.
Entrepreneurs
A core aim of the Autumn Budget 2026, Breathing Space for Today, Fresh Hope for the Future, is to strengthen the U.K.’s appeal as a location for entrepreneurs in fast-growth sectors to start and scale their businesses. To support this aim, the government is introducing targeted tax reliefs and broadening the scope for business owners to reward and incentivise key employees. The main measures are outlined below.
Founders’ Relief: From 6 April 2027, the government intends to introduce Founders’ Relief, offering a 10% CGT rate on the first £10 million of qualifying gains for founders of high-growth, innovative companies. Eligibility will be subject to stringent conditions relating to turnover, headcount and/or research and development spending targets, as well as links to the U.K. The relief will be introduced into law through Finance Bill 2026–27, following a technical consultation that concludes on 30 November 2026.
Business Assets Disposal Relief: Alongside the introduction of Founders’ Relief, the government will reduce the lifetime limit on gains eligible for Business Assets Disposal Relief (BADR) from £1 million to £500,000. BADR offers an 18% CGT rate on qualifying disposals. The reduced lifetime limit will apply to disposals made from 6 April 2027.
Enterprise Management Incentives (EMI) 2: From 6 April 2027, the government will increase the Company Share Option Plan (CSOP) individual option limit from £60,000 to £120,000 and remove its interaction with the EMI option limit. Eligible employees will therefore be able to receive the full number of options available under each scheme. The CSOP exercise period will also be extended from 10 to 15 years. To clarify how the schemes fit together, CSOP will be renamed EMI 2, reflecting its role for growing companies that have moved beyond EMI or are not eligible for it.
Investors
While a commitment to not raise income tax on working people was contained within the Labour Manifesto, the government today announced an increase in taxation on investment income.
Higher taxes on investment income: From 6 April 2027, the basic and higher rates of tax on savings and property income will increase by a further 2 percentage points, in addition to the 2 percentage point increase previously announced, meaning that the top rate on these income sources will reach 49%.
Cash ISAs: The annual subscription limit for cash Individual Savings Accounts (ISAs) will now remain at £20,000 and not be cut to £12,000 as had previously been announced.
The Fiscal Devolution Roadmap
Beyond announced measures for entrepreneurs and investors, the government is publishing the Fiscal Devolution Roadmap, setting out plans to reform regional government funding. Mayors will join the Business Rates Retention system from 2027–28 and receive a share of income tax from 2028–29. Strategic authorities will also be able to introduce visitor levies, with local leaders able to set out plans for investing the revenues by March 2028.
What it means for you
Faced with a shrunken buffer and a nervous bond market, the Chancellor upheld fiscal rules, left headline tax rates unchanged and raised spending from narrower, more targeted bases. But preserving market confidence is not the same as resolving the U.K.'s longer-term fiscal challenges. Debt stands at £3 trillion, interest costs are rising faster than forecast, and the economy's ability to grow its way out of the squeeze still rests on sluggish productivity. The heavy reliance on gilt issuance leaves the public finances highly sensitive to global bond-market sentiment.
Markets had given the government the benefit of the doubt and not baked in a negative risk premium ahead of the announcement date. The budget lived up to these expectations and ensured the U.K. steered clear of the market’s focus on fiscal issues in Europe. Therefore, the reaction was only benign: Gilts slightly outperformed peers across tenors and sterling was supported marginally against the greenback.
Beyond the fiscal outlook, the measures have different implications for business owners and investors: targeted support for qualifying founders and employee share schemes sits alongside reduced relief for other business disposals and higher taxes on savings and property income. It should be noted that most provisions are being brought in in the next tax year and some remain subject to consultation and legislation, such as the new Founders Relief.
Budget at a glance
- Bank Corporation Tax Surcharge: Temporarily increased from 3% to 6% for 15 months, from 1 January 2027 to 31 March 2028.
- Capital Gains — Offshore companies attributed to U.K. residents/protected cell companies: Finance Bill 26-27 will amend capital gains participator rules for non-resident close companies to ensure they apply to protected cell companies with effect from 28 October 2026.
- Capital Gains — Trust exit charge and trustee migration: Administrative easement to the CGT “exit charge” when a trust stops being U.K. resident, to make relocation to the U.K. easier for globally mobile talent. Legislation in Finance Bill 2026–27 applies to exit charges on or after 28 October 2026.
- High Potential Individual visa expansion: Expanded to include the top 150 global universities.
- Investors in U.S. Limited Liability Companies (LLCs) and other reverse hybrids: In response to a consultation published in June, the government will create a mechanism to provide double taxation relief for income received by investors from certain foreign entities where relief is currently unavailable. The government has published a response which sets out more details on the mechanism and further steps for consultation ahead of legislation being included in Finance Bill 2027–28.
- More timely payment for Self-Assessment: From April 2029, Self-Assessment taxpayers who currently make “payments on account” will be required to make more regular in-year payments toward their final bill.
- Tax treatment of image rights payments: Image rights payments connected to employment will be clarified as taxable employment income with the effective date moved to 6 April 2028.
- Income Tax — Pension Tax Allowance (PTA): New allowance to stop pensioners with total income up to the full new State Pension from having to pay small amounts of tax. PTA is calculated as 20% of the gap between the full new State Pension and the Personal Allowance; applies automatically for those over State Pension age with income at/below the full new State Pension value; tapered withdrawal for incomes just above. Applies 6 April 2027 to 5 April 2030 and will be uprated in line with the full new State Pension during this Parliament.
- Business rates — Small Business Rate Relief (SBRR) thresholds for Retail, Hospitality and Leisure (England): From 1 April 2027, thresholds rise. 100% relief up to £18,000 rateable value; tapered relief up to £21,000.
- Alcohol duty: Duty rates increase in line with RPI to maintain real-terms value. Small Producer Relief becomes relatively more generous via a more generous discount taper for products under 3.5% ABV and an uplift to the marginal discount for 3.5%–8.4% ABV of RPI + 10%. Implemented from 1 February 2027.
- Annual Tax on Enveloped Dwellings (ATED): Annual charges increase by 3.5% (in line with September 2026 CPI) for the 2027/28 charging period.
- Tax treatment of stablecoins: Finance Bill 2026/27 will treat eligible stablecoins more like money for tax purposes, changing rules for individuals, trustees and companies while extending withholding tax. Effective from April 2027.
Sources
Budget 2026 Breathing space for today fresh hope for the future
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KEY RISKS
For illustrative purposes only. Opinions, estimates, forecasts, comparisons and statements of financial market trends constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. We do not provide tax advice.
Important Information
The 2026 Autumn Budget kept headline tax rates unchanged, leaning instead on targeted measures like a temporary bank surcharge hike and reduced business reliefs to raise revenue.
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