Equity Research; Budget 2025 ahead

Budget 2025 ahead

The delayed Budget 2025 suggests the Chancellor needs extra time to consider in depth measures.

The context for Budget 2025 is the widespread critique that the October 2024 Budget £40bn tax raising measures, increasing employer’s NI to 15%/ reducing the threshold (£25bn) and higher CGT to 18%/ 24% were spent faster than accrued via a £22.6bn increase in NHS spending and £13.6bn for funding compensation linked to infected blood/ Post Office etc.

The September 2025 PSBR at £20.2bn was up £1.6bn vs September 2024. So there was no net financial improvement despite the financial pain.

Over 2025, the UK government had to u-turn on Disability Benefit reforms and the Winter Fuel Allowance losing £6bn of budgeted savings. The main cause of the u-turn was public and bankbench opposition. Furthermore, the Trump administration is demanding both a higher NATO Common funding budget (€5.3bn in 2026 from €4.6bn in 2025) and increased contributions from its allies for the Security Investment Programme.

UK debt interest financing and the BoE quantitative tightening program are also over Budget.

The backdrop is a significant fiscal effort is required yet again, and one that does not repeat last October’s errors.

Possible tax scenarios

Ahead of the November 2025 Budget, the government’s challenge is meeting its 2029/ 2030 objective of balancing the UK’s books without touching ‘working’ people with VAT, income tax, NI increases. This means a net tax rise in non-core areas, and a wealthy focus. The government apparatus has guided in this direction.

The Institute of Fiscal Studies (IFS) says the Chancellor must raise £22bn. Most commentators think the target is around £30bn.

Possible alternative tax scenarios:-

“Low’’ Raising up to £20bn

• Reducing pension tax-free cash withdrawals to £50,000 (current lifetime limit is £268,275), possibly £5bn
• Extending the income tax/ NI threshold freeze from end 2028 to 2030 would raise £10.4bn
• Hiking Fuel Duty (allowing 5p/ litre fuel duty cut to expire) could raise £2.6bn (this could be impacted by EV adoption)
• Changing limited liability (LLP) tax treatment- LLP’s currently do not pay employers NI- this could raise £2bn
• Abolition of £500 dividend allowance – raising c. £400m

‘Medium’ Raising up to £30bn

• One off wealth tax on those with assets> £6m- c. £10bn
• Ending CGT exemption on deceased estates could raise £2.5bn
• Applying NIC at 8% to rental profits and/ or other landlord directed items- this would be significant given the £28bn rental income declared in 2024; raising £2.25bn

‘High’ Raising £40bn+

• Introduction of a lifetime cap on lifetime gifts that can be made free of tax
• Increasing the Bank Levy- a 1% increase in the surcharge would raise £2.5bn
• Double Council Tax rates on the highest 2 bands – would raise £4.4bn

Also relevant are demands for Labour govt to scrap the 2 child cap on child benefit allowance as a means of addressing child poverty. A full reversal of the cap, introduced in 2017, would cost c. £3.6bn.

Implied in Labour’s mandate is the vital importance of keeping investors and creditors onside and the avoidance of a bad Budget/ Truss event that causes a sterling stampede and other undesirable impacts. The PM has not shirked from trying to address the UK’s structural deficit and debt load problems even if last October was a mis fire.

But is another ‘austerity-lite’ menu of stealth taxes, sufficient to boost Labour support in its urban heartlands? Does salami-slicing tax allowances lift Labour’s grassroots? All PM’s need to keep their party onside. A recent Survation poll found 76% of Labour Party members would back breaking pledges on income tax, VAT and NI if it meant yet more spending on public services [ i.e. throwing more money into the bottomless pit of the NHS]. This is contrary to the government’s intentions.

On the current trajectory, the UK is headed for a ‘hung’ Parliament in 2029/2030, and a possible Lib-Lab pact / coalition government.

The UK ongoing problem of weak tax revenue/ rising expenses is reflected in the fact that UK bond yields have diverged from cash yields. Despite the 1% drop in UK Bank Rate to 4% over the last year – the yield curve has lifted 34 bps- 59bps in the 10 year-30 year range. A successful Budget will be judged on its ability to bring the two closer to re-alignment.

Risk factors

In recent years, Britain’s UK structural problems have become obvious and pressing. The UK is a ‘rentier’ economy focused on assets not innovation. The two decade technology boom has largely bypassed Britain.

There has been a drainage effect with large numbers of UK listed companies leaving for lower tax jurisdictions and achieving higher valuations. There is virtually nothing incoming. This ‘corporate’ brain drain is alarming in that post Brexit, the UK appears alone in experiencing this problem.

If we assume a tax raising Budget, then the follow on issue is ‘exodus’ risks.

• Given the top 1% of UK taxpayers contribute 1/3^rd of total income and CGT receipts (£93.8bn) there is considerable risk involving in imposing taxation. The top 100k tax payers pay £55bn to the UK. Over the Brexit period, the UK has lost 12,500 millionaires (2017-2022). However in 2024 alone it lost 10,800. London and Moscow are the only 2 cities to have had a net loss of millionaires over the last decade.
• The OBR had predicted the April 2025 change to the non-dom regime would increase the tax take by £33.8bn over 2025-2030 however this assumes the non dom population stays the same. Changes to IHT will cause an exodus of previous non doms quickly.
• Loss of large companies, lower IPOs and listings – the Budget must not achieve an acceleration of the current rates of corporate migration.
• Current UK 0.3% GDP growth is fragile with GDP acceleration a way off

Conclusion – a deflationary Budget ahead

This will be a ‘horses for courses’ Budget, in that outcomes are binary. For example a) a higher Bank Levy will hit UK banks b) changing pension allowances will hurt annuity/ life providers/ fund managers c) higher gaming levies will hurt betting companies. Much will depend on who gets hit and who does not.

A Budget that is ‘fiscally responsible’ taking cash out of the economy, should lower inflation and rate expectations over 2026. A cut to 3.75% is remotely possible in 2025 though the BoE will wait for an inflation down swing hence this is likely a 2026 event.

Overall a deflationary budget should be positive for:-

• Fixed income; medium/ long dated bonds – our expectation is the 10 year yield < 4% and 30 year yield < 5%.
• Sterling higher, hence improving mid cap equity performance
• Defence companies should gain from reshuffled Budget priorities.
• Housebuilders, consumer discretionary, travel & leisure sectors on lower rates
• Utilities / Alt energy- likewise beneficiaries of lower yield curve.

Budget fear mongering has occurred again and this will ramp up over the next month. A tough Budget will impact market sentiment over the December period.