2026 Budget: Our predictions

Jenna Glass: Hello, and welcome to the Insight in 15. I'm your host, Jenna Glass, and I'm joined today with KPMG UK's head of tax policy, Tim Sarson. Tim is joining us today to provide his predictions on the budget, which will be announced October 28. Welcome to the podcast, Tim. 

Tim Sarson: Hi, great to be here. 

Jenna: Looks like this is an annual event for you now.

Tim: Yeah, well, unless they start making the budget twice a year again, in which case, might be here more often. But yeah, annual autumn tradition now.

Jenna: All right. Well, we're happy to have you. We've had two different budgets under labour since 2024. We have new leadership, a new chancellor. What are we expecting to see in this budget?

Tim: Yeah, big question. This is harder than previous years, certainly harder than the last couple of years for me. Because I think with the Starmer and particularly Rachel Reeves as chancellor, we sort of knew what was going-- in fact, we knew too much before the budget.

But even last year, loads of speculation, stuff coming out of think tanks, stuff clearly being leaked from somewhere inside government as well, and the papers doing their bit just to sort of make it even more exciting. And of course, we'd had a lot of trailing on what was likely to be the fiscal situation, and therefore what was the gap that needed to be filled. This year, very, very different. They've gone very quiet. They've managed to keep the leaks out. And so it was a little bit more of a mystery. We know less about Healy and his background, and certainly his ideology, than we did about Rachel Reeves too.

So we'll go into what I think might happen or might not happen, but just to stay at the outset. My confidence in what is going to happen this year is less than it has been for the last two.

Jenna: So with high borrowing costs and stubborn fiscal gaps, is the chancellor going to have to raise taxes?

Tim: I think net-net, we probably will see an increase in the overall tax burden.They probably didn't want to do that, but I think net-net, that's what we're going to get. That doesn't mean that there won't be a few giveaways, little mini-givers. The other thing that they're really interested in is, and have already shown, is kind of little feel good measures that don't cost much to the Exchequer, but will appeal to the voter, you know, bus fares, things like that. Vat on hospitality being another.

But I think we're going to be back to what I think journalists coined the smorgasbord approach. So don't forget that most of the big sources of tax revenue rises in those were ruled out in the Labour manifesto. They found ways around that to an extent, like with employers' nicks.

But it means that you're left with a small part of the pie chart that you can then do something about on tax rises. And that small part of the pie chart is then made up of lots and lots of other even smaller bits.

And that's where your smorgasbord or your picamix comes in. I think it will be very targeted areas of potential tax rises in certain bits of the code. Alongside fiscal drag, this is the freezing of thresholds, which means that inflation does a lot of the work for them. And then offset by some inevitabilities, like they're almost certainly going to freeze or even cut fuel duty, given what's happening with fuel prices at the moment. And that puts a further dent in the Treasury numbers.

Jenna: So you mentioned this budget. It's kind of hard to anticipate what's in there. What are clients saying about it, and are they doing anything to prepare for the 28th?

Tim: Yeah, different groups of clients doing different things. So every year, private investors and that's everything from your sort of owner managed businesses or families to private equity. Every year, they worry, quite rightly, I think, about what's going to happen to capital gains tax and the CGT rate. And every year, we get questions coming from clients about whether they should trigger a disposal, or they should accelerate one of their deals to close before budget day in case the CGT rate comes up. Not surprisingly, no one's saying, let's delay, because the rate might come down. So there's that.

Now, the question is whether that's based on actual intel or just fear. And I think it's based on fear. But it's based on fear that has some foundations to it. Remember, come back to that bit of the pie chart. One of the bits of the pie chart that was not ruled out for tax rises was the capital gains tax rate.

A couple of areas that are quieter and where there's less chatter and less worry this year than there has been recently, one of them will be about state planning and inheritance tax from either from our sort of landed clients or large private owners. I don't think there's a feeling that inheritance tax is going to be touched this time in one direction or another, either of sort of easing of what happened in 2024 or further restrictions.

So there's less noise there. I think there's a strong expectation. The corporate tax rate, it's 25%. It's staying 25% for the foreseeable future. It's not going up or down. And there's probably not going to be any major reform of incentives or the way that the base is calculated either. That's not to rule out that there might be a few changes in those areas, but nothing massive. 

Under the surface of all that, there's a whole load of work that HMRC and the Treasury have been doing and are continuing to do on reform of the system on things like our distributions and our treatment, and there's been a consultation on that. None of that has really changed because we don't have-- though you and others will describe it as a new government, it's not actually a new governing party. It's just a change at the top. And a lot of the junior ministers are the same as before. So that sort of continues as does our implementation of international standards like the OECD, PILOTU, and so on. 

There are a few sectors that will also be concerned. You think about what often happens when there's a crisis, particularly an inflationary crisis. That's where the risk of windfall taxes or the likelihood of windfall taxes grows.

In the past, when we've had big oil price rises, we've seen windfall taxes or additional taxation on extraction in the North Sea. I think it's unlikely we're going to see that this time because I think there's a recognition that the rate is such that it's now having behavioral impacts on drilling.

The other one that's been talked about is banking taxation. Banks already pay more tax than atypical company because they have the surcharge on the corporate tax rate and they have the bank levy. But there has been talk about will the surcharge go up, for example. I think that's less likely than one of the other things that has been out there in the world of think tanks, and that was a windfall tax in relation to profits made during the QE period, the quantitative easing period. Still think it's less than a 50% likelihood,

Jenna: So touching in a little bit on some of these sectors, we know with the new leadership, we're expecting them to be kinder towards high street businesses, hospitality. We've already seen a 20% reduction in taxes for pubs, small clubs, live music events. What else are we expecting in this space?

Tim: There's been a long running-- well, not that long, but there has been an ongoing consultation on reform of the business rates system. And this has been-- so business rates are considered pretty dysfunction, I think, by this cross-party consensus pretty much that something needs to happen to business rates.

But I think there were maybe some expectations early on in the Burnham premiership that we might see a more radical overhaul. There's no suggestion of that happening, certainly talking to my business rates colleagues. The consultation, as it is at the moment, is looking at tweaks to the system. But the direction of travel is similar. Those tweaks to the system are likely to ease the burden a little bit on the high street, inverted commas and on hospitality.

But because business rates reform, the expectation is that has to be tax neutral. That means someone else is bearing the cost, and that someone else is likely to be the larger buildings, the warehouses, the data centers, and so on. So I think we can expect to see more of that. There was also quite a lot of speculation-- not just speculation, but Burnham has talked about it himself-- about fairly major changes to property taxation for individuals or for households.

So might we get rid of stamp duty land tax? Might we increase the amount of tax that is taken on the value of housing? Might we move to a land value tax?

The suggestions are that none of that is likely to happen in this budget, aside from the already announced pre-Burnham government policy of the so-called mansion tax-- in other words, increased council tax on high value properties. And some speculation that the threshold might come down to $1.5 million,

Jenna: Moving on to some other big themes from this leadership-- devolution, Manchesterism. Are we expected to see fiscal devolution, do you think, with this leadership? And what's going to be the impact, on the regional economies?

Tim: We're not looking at some sort of federal tax system. What's on the table at the moment is that the merities and the strategic authorities will have more leeway or more latitude to decide how they spend and where they spend the money that is collected by central government. And that will have an impact on how much tax revenue they actually get, depending on the choices they make and GDP growth in their area.

As for tax devolution, which is where things really get quite interesting, there's one example at the moment. And that's this new overnight stay levy, the so-called tourism tax. The rate for that will be set by the local-- by the merities and the strategic authorities. And you can argue whether that's the right level, should it be local authorities, what's the right sort of level of devo. But that is a devolved tax. I think what might come next-- we're going to go into tax devolution, probably the next step would be real estate taxation, would be property taxation.

But I would be interested-- I wouldn't completely rule out, particularly under this leadership, particularly given the thresholds that are being crossed on talking about things like the pensions, triple lock, about the EU membership, stuff that was taboo before.

Might we not see proposals in due course that a proportion of corporation tax, for example, should be local, and then there will be a federal rate as well? And I think that would be a really interesting development.

Jenna: OK. Quick fire round, Tim. Are we expecting any changes to property taxes?

Tim: Only things already in the pipeline announced by the government.

Jenna: VAT.

Tim: Only things already in the pipeline announced by the government, like a cut for hospitality.

Jenna: Capital gains tax?

Tim: Difficult one. Everyone's speculating on this, I think, quite possible, yes.

Jenna: OK. And what about windfall taxation?

Tim: I think that depends on what happens to interest rates over the next couple of weeks. Potentially, but I wouldn't rule it out.

Jenna: And lastly, income tax rates and thresholds.

Tim: Frozen again.

Jenna: So Tim, you are chancellor. I bestow you this power. What would you do with this budget?

Tim: What would I do? I would do a load of things that are probably not going to be done. I would fix-- a complete no-brainer to fix the very high marginal rates we get at certain levels of the income tax spectrum, particularly at the sort of 40, 50k level and at the 100k level. And this is to do with the interaction of both tax thresholds and the withdrawal of all the tapering of allowances and child benefit, et cetera. I'd fix those. There are ways of fixing them that are broadly tax neutral, because they discourage workforce participation. Makes no sense to keep those.

I would do some things around incentives for corporates, which I don't think would cost that much if they're targeted appropriately. Full expensing is very costly to the treasury in terms of the way the numbers work, even though it's just a timing difference.

I think there is some benefit to thinking about particular types of capital spending, where we could give super deduction. So you're actually getting something more than just a timing benefit. Green investment, investment in expanding or building the grid so that we can actually get access to that cheaper energy that we're generating from renewables. Maybe some of the investment in high end AI applications as well. And likewise, our patent box regime. It's great if you're working in life sciences or in, say, automotive, where your products are patented. It's not so great if your products are largely covered by software copyrights. And so I think there are things we could do there to make us more in line with other countries.

Jenna: Time's almost up. So one last question for you. What is your one piece of advice for businesses who are listening to your predictions or awaiting the budget announcement?

Tim: Don't expect a blockbuster, either good or bad. So I don't think it's going to fulfill your wildest dreams, but I also don't think it's going to take you into your worst nightmares, either. Expect a bit of a pick and mix. Expect a couple of surprises, but probably quite small surprises. And keep your eye on some of the things that are going to happen outside the budget, probably announced by the prime minister rather than the chancellor, because a lot of the long term reform of our fiscal and tax system is likely to be happening on longer time scales outside the budget cycle.

Jenna: Thanks for joining us today, Tim. And that's all the time that we have on The Insight in 15. If you want to see if Tim's predictions are correct, you can follow along on our budget 2026 web page. Please also like and subscribe to this podcast on Apple Podcasts, Spotify, and YouTube. Thanks again for joining us on The Insight in 15.