UK Budget 2026: What to expect

7 October 2026

Last updated: 16 October 2026

Katie Close CA
Director of Tax, ICAS

The UK Budget is set to be announced on 28 October. As the first Budget since Andy Burnham became Prime Minister and with a difficult economic backdrop, we consider the possible tax options.

Labour pledged not to increase income tax, national insurance or VAT in their 2024 manifesto. If they keep these promises, then raising the funds needed to meet the fiscal rules and cover any new spending plans, including the defence spend commitments, will involve increasing the rates of minor taxes and/or spending cuts.

The past two Budgets have seen unprecedented tax rises, with 2025 being the largest tax revenue raising Budget in the last 50 years. Much of this has been accomplished through fiscal drag as the constraints of the Labour manifesto meant the largest yielding taxes have been off the table.

Andy Burnham’s priorities seem to be around national security, devolution and cost of living. He is also a long-time advocate of taxing wealth with changes to capital gains tax, property tax and inheritance tax all attracting significant media speculation since coming to office.

In this environment of limited routes for raising tax revenue, increasing costs of government debt, and a diminishing fiscal headroom, it will be difficult to avoid further tax revenue raising measures. However, it is not clear how the Government will achieve this given the room they have for manoeuvre.

Income tax and NICs

If the Labour government decided to break the manifesto pledges, then increasing the rate of income tax would be a major source of additional tax revenue. Income tax, along with national insurance and VAT, makes up over half of the UK tax receipts.

Source: House of Commons Library (based on ONS data) Tax statistics: an overview - House of Commons Library

Increasing the rate of income tax in the UK would present significant challenges to the Scottish fiscal position, due to the way that the block grant funding works. The Scottish Government sets the income tax rates for Scottish taxpayers, so the increases would not apply in Scotland.

However, an increase to the income tax rates made by the UK Government would mean an adjustment to the funding Scotland receives, reducing the amount of the block grant. This effectively compensates the UK Government for the revenue it would have raised if the income tax increases had also applied in Scotland. When similar plans were suggested in 2025, the impact of a 2% increase in the basic rate of income tax was estimated to be a £1bn reduction in Scottish funding.

The 2025 Budget announced further freezes to the income tax thresholds until April 2031, so there will be additional revenues raised through fiscal drag. There has been speculation that the personal allowance may be unfrozen in the next Budget, however the cost of this measure would be high. The Institute for Fiscal Studies (IFS) estimates that returning to inflation uprating from April 2027 would cost £8.4 billion based on current inflation forecasts.

NICs were part of the pledge from the Labour government to not raise taxes, so past Budget measures have focused on employers NIC along with the revised salary sacrifice rules for pensions. Indications are that further NIC changes are not expected.

VAT

VAT is a complex area of the UK tax legislation, and issues around the correct VAT treatment of food often finds its way to the court system. The Mega Marshmallow case is one of the most recent examples, where multiple court hearings over four years hinged on whether you ordinarily ate a mega marshmallow with your hands (standard rated) or not (zero rated).

Simplification of the VAT system is one of the most necessary reforms required of the UK tax system. Cases like Mega Marshmallow clearly demonstrate the level of uncertainty that exists in the VAT system and the time and money it takes to resolve it. However, achieving simplification of VAT is not an easy task.

If we look at the case for expanding the tax base by applying the standard rate of VAT to a wider range of goods, this is an easy decision for fiscal sustainability but a difficult decision politically. According to research by the IFS, the reduced rate, zero-rate and VAT exemptions account for around £97bn of potential revenue (based on 2022/23 data). The zero rating of food alone accounts for around £27bn (2025/26).

A vast amount of revenue could be raised by applying VAT more evenly across all goods and services. Other countries, such as New Zealand and Singapore, successfully operate wider bases for VAT using a single rate. However, the attempt in 2012 to introduce standard rate for hot takeaway food, and so removing a distortion in the VAT system, was met with strong public resistance. Partly, this displays a valid concern with the VAT system – the inherent regressivity.

Simplification of VAT is not easy because removing the reductions and exemptions from VAT would impact the lowest earners more than others. A single rate, broad-based VAT system is inherently regressive. New Zealand’s solution was to introduce a wider reform package redistributing resources to those who would be hardest hit. The UK would need to consider the balance of simplicity and fairness if it were to tackle the VAT system.

Andy Burnham has announced a VAT cut on domestic electricity bills, reducing it from 5% to 0% until at least March 2027. Priorities on VAT are clearly focused on using it to address cost of living concerns (and with some effect for reducing inflation). Realistically, the largest overall gain from this VAT cut will go to those higher earners, who use more electricity, rather than targeting the people most in need. Politically, this suggests that there is no appetite for significant reform of the VAT system, even though it could be one of the most effective means of generating additional revenue.

Corporate Tax

Labour pledged to not raise Corporate Tax beyond 25%, leaving limited room for movement if they adhere to their manifesto. However, this does not necessarily rule out sector specific changes. Introducing additional corporate taxes for sectors such as banking or oil and gas (where additional levies and taxes already apply) could raise further revenue without breaking the manifesto pledges.

The Trades Union Congress has advocated for an increase in the surcharge applying to banks, and recent media reporting has suggested that this is being considered by the Chancellor. This is likely propelled by the large pre-tax profits being reported by the UK’s largest banks. However, the banking sector has warned against this, maintaining that any further bank surcharges would stifle economic growth and encourage finance roles to move out of the UK.

While no sector is likely to be enthusiastic about proposed tax increases, ultimately the effectiveness of such a tax would be dependent on the policy design, behavioural change and economic impact.

What could happen?

The cost of borrowing for the UK Government is very high, with 10-year bond yields currently 5.3%. This means not only that further borrowing to cover spending is undesirable but also that much of the fiscal headroom created at the last Budget has been consumed by servicing the existing debt. Effectively, we are standing still in terms of further tax raises – it’s as much about needing to raise more just to keep pace with existing obligations as it is about wanting to finance additional spend.

A significant source of media commentary has been on equalising capital gains tax (CGT) with income tax. This is an option open to the Labour government if it wants to keep to its manifesto promises. However, CGT is not a significant tax revenue generator in terms of the UK Budget, with OBR estimates for 2025/26 around £20bn, which is 1.6% of all receipts. CGT is also sensitive to behavioural changes, so it is not certain how much additional revenue equalising CGT with income tax may raise.

A far better proposal would be to reconsider CGT from a more fundamental position, by looking at the tax base rather than just rates. This would allow for meaningful reform of some of the most distortive aspects of CGT, which currently include incentivising individuals to hold onto assets for tax reasons and disincentivising investment. Raising the rates without addressing the underlying system risks magnifying some of the less desirable aspects.

Recent announcements on the changes to the triple lock and the social care system from 2030 mean that there will be no changes in the next Budget, however it will factor into future budgetary considerations. Removing the earnings link from the triple lock, so that pensions will rise in line with the higher of inflation or 2.5%, will see some savings immediately, likely becoming more significant over time.

The proposal to provide free social care services in England will require tax rises as the triple lock reform by itself will be unlikely to fund it fully. Social care is a devolved policy area, so there will be implications for Scotland. Higher spending for social care means potentially more money for Scotland in the block grant but depending on how this is funded in England, it could also mean reductions from the block grant in other areas. This means a period of greater uncertainty for the devolved budgets.