i. Overview
 

Budget outlook
 

There are 20 days until the Chancellor delivers his maiden Budget. It will be delivered against a changing political backdrop. Since becoming Prime Minister, Andy Burnham has begun to set out his priorities for government, with Labour Party Conference providing further insight into the administration's emerging direction of travel. While it remains too early to draw firm conclusions about the extent to which this will shape Budget decisions, themes such as devolution, regional growth and public service reform are likely to feature prominently in the Government's wider economic agenda.

Alongside these political developments, the machinery of government continues to advance a substantial programme of tax and fiscal policy work. While the broad trajectory of recent consultations and announcements remains intact, the Government has shown a willingness to revisit specific policies where economic or political circumstances warrant it, underscoring the importance of maintaining flexibility in assessing potential Budget outcomes. However, to date we have seen no sign that recent tax consultations or announcements are being rethought.

Speculation over possible measures is beginning to build, although the debate is notably more measured than in recent years. Our expectation is that the Government will avoid another major tax-raising Budget. Instead we expect it to be an exercise in ‘doing what needs to be done’ with a devolution thread running through it and a few giveaways that won’t break the bank. The real focus is on the 10-year plan, which will be published after the Budget, and the Spending Review expected next year.

Fiscal pressure and tax choices
 

A low-key Budget doesn’t mean no tax rises.

The rise in borrowing costs following the conflict in Iran has eroded much of the fiscal headroom. The Chancellor John Healey will have to choose how much he wants to restore. With the Prime Minister committing to the 2024 manifesto tax pledges not to increase the rates of the main taxes, and in the absence of borrowing or spending cuts, tax rises will be needed. But he will try to keep them to a minimum.

Key Budget considerations include:

• How much fiscal headroom the Chancellor wants to maintain. 
• How to fund existing commitments such as removing VAT from electricity bills, cutting business rates for pubs and some other venues in England, and other measures which total about £1.8 billion.
• How to fund the shortfall in the Defence Plan, estimated by the IFS to be in the region of £4.7 billion.
• Whether small giveaways can be made to give households a little breathing space.

The Chancellor will also have an eye on the energy price cap which is expected to increase significantly in January 2027, and may mean some short-term targeted support will be needed.

More difficult questions including future defence spending, departmental spending plans , and funding social care reforms will be deferred. The Prime Minister’s speech at Conference means that social care is now expected to be a key theme in the next Labour manifesto.

Tax options are narrowing
 

With manifesto red lines ruling out increases to the main rates of tax, the Chancellor will be limited in his options.

We expect The Chancellor will target the smaller revenue raising measures not ruled out by manifesto commitments and focus on increasing rates or scaling back reliefs. He could also look at expanding the base of the main taxes (VAT, Income Tax and National Insurance) without breaching manifesto commitments.

This ‘smorgasbord’ approach may get the Chancellor to where he wants to be, but it leads to more complexity in the tax system and may prove unpopular with affected groups.

The Chancellor could look at sectoral taxes targeting the banking or energy sectors but is likely to be cautious given his growth ambitions. 

Finally, the Chancellor could introduce a completely new tax such as a defence levy or a social care levy. This is unlikely. Such a measure is more likely to be considered alongside major policy reform, much of which is being delayed. 

Businesses will be hoping for some measures that encourage investment and growth.

ii. Business Taxes

Corporation Tax

The Government is aware of the importance of economic growth and so will not look to raise taxes on business unless absolutely necessary. 

The manifesto ruled out increasing the corporation tax rate from its present 25% and the corporate tax roadmap committed to keeping the main reliefs intact. 

KPMG Prediction: No increase to corporation tax rate and no significant reform to corporation tax.

Sector taxes

Sector-specific taxes remain one of the few options available to raise revenue, most notably in the energy and banking sectors. Energy companies are already subject to sector taxes including the Energy Profits Levy and the Electricity Generator Levy. Increases to energy taxation cannot be ruled out but we think it is unlikely. 

Banking taxes may be more susceptible to change. The corporate tax roadmap said that the Government would keep the banking tax regime under review. Changes could be to raise the surcharge just a few percentage points or to put it back to its pre-2023 level of 8%, which would raise c.£2 billion per annum. Alternatively, the Government could introduce a form of windfall tax through, for example, taxing interest paid to banks on their reserves held at the Bank of England. Nevertheless, we expect the Chancellor to be cautious about introducing additional tax burdens unless fiscal pressures leave few alternatives.

KPMG Prediction: No additional taxes on energy producers and an increase to the Electricity Generator Levy or taxes on banks is probably less than fifty-fifty.

Investment and innovation incentives
 

There are opportunities to improve the UK’s tax competitiveness without significant cost. We would welcome targeted measures that would kick start some much-needed investment.

This could take the form of more targeted incentives for strategic sectors or activities, perhaps expanding the Patent Box to include a broader scope of intellectual property such as non-patented software, aligning with competitor jurisdictions such as Ireland and the Netherlands.

The Government could expand existing incentives to include credits linked to social security costs, which some other countries do and which would incentivise employment, or to widen the R&D regime to include early adopters of new technology.

KPMG Prediction: Unlikely at the present time but we would hope it would be a government priority when the fiscal envelope allows.

Simplification and administration
 

The tax system could be simplified so that there is greater certainty and less complexity.

The implementation of the global minimum tax in the UK overlaps with some existing internationally focussed regimes. A review of the Controlled Foreign Company regime designed to prevent companies shifting profits offshore, and the Hybrid and Anti-Arbitrage rules designed to neutralise international mismatches, could simplify compliance for multinationals.

Similarly interest deductibility for companies is subject to several different parts of the UK tax code: Corporate Interest Restriction, Transfer Pricing, Unallowable Purpose and Anti-Hybrid rules. This adds complexity and uncertainty for taxpayers looking to debt finance investments. One regime would reduce uncertainty and support investment.

The Advance Tax Certainty Service (ATCS) introduced in July is intended to provide taxpayers with tax certainty on large investments with over £1 billion of project spend. It is still too early to see how successful this will be but there has been criticism due to the high spend threshold and the limited scope (for example it doesn’t offer certainty on Anti-Avoidance provisions). We think that tweaks to the scheme could make it much more effective and accessible for taxpayers.

KPMG Prediction: Changes to make the ATCS more flexible are likely. Simplifying the interest deduction rules and the rules that overlap with Pillar Two may need to wait for a later Budget but they both have the capacity to make the UK significantly more competitive at little cost.

iii. Indirect Taxes on Business

VAT threshold
 

The VAT threshold has been frozen at £90,000 since 2024. The threshold is often cited as a barrier to growth with clear evidence that businesses ‘bunch’ near the threshold, choosing to turn down work rather than increasing prices by 20% and dealing with the VAT return compliance.

The VAT threshold distorts the market by giving smaller businesses a competitive advantage. Increasing the VAT threshold does not remove this distortion, it merely moves the cliff-edge. A better system would be to have a gradually increasing VAT rate as a business grows.

However, increasing the VAT threshold is difficult within the terms of the Northern Ireland protocol and the Windsor framework, and it is not clear the Government would want to introduce different VAT thresholds across the UK. 

KPMG Prediction: An increase to the VAT threshold is unlikely.

Hospitality
 

In July Andy Burnham announced a 20% cut in business rates for pubs, clubs and some live music venues effective April 2027. 

Over the summer the hospitality sector has been running a campaign to reduce VAT for hospitality from 20% to 10%. This is to compensate for cost increases due to increases to employer’s national insurance, the national minimum wage and business rates. 

The Prime Minister has previously indicated he would argue for a reduced rate similar to many European countries. However, the Government has not committed to this and the business rate cut may be perceived as a more targeted way of providing relief to the sector.

KPMG Prediction: Reduced rate of VAT for hospitality is fifty-fifty. The Chancellor may seek to give more targeted support such as more extended business rates relief for small businesses in England or initiatives such as the Great British Summer Savings scheme.

iv. Taxes on Income
 

Thresholds
 

Frozen income tax thresholds have done much of the heavy lifting in terms of increasing tax revenue. 

In November 2025 the OBR estimated that the freeze of income tax thresholds will raise over £55 billion in 2030/31 (including the impact of lowering the additional rate threshold). 

Before Andy Burnham became Prime Minister he mooted reviewing the Personal Allowance. HMRC estimates that every £100 increase in the Personal Allowance would cost £1 billion. If the personal allowance had risen with inflation since 2021 the IFS estimates that it would have increased by c. £3,500 to c. £16,070.

The Chancellor could extend the freeze for a further year until 5 April 2032. It could raise significant tax revenue, and it can always be reversed if the public finances improve. If the Chancellor were to freeze or even reduce fuel duty, freezing income tax thresholds would help counteract the cost.

KPMG Prediction: Likely to see thresholds frozen for another year into 2032

Cliff-edges
 

The income tax system has many cliff-edges, most notably at £100,000 where the personal allowance is tapered away leading to a marginal tax rate of 60%, and free childcare is removed. These cliff-edges influence behaviour – usually by people reducing working hours. But removing the personal allowance taper would cost c. £6.5 billion. It would also be politically difficult as higher earners would be the beneficiaries.

KPMG Prediction: Cliff-edges are here to stay for a while yet. 

Expanding the scope of National Insurance or Income Tax
 

The Government may look for ways to raise additional revenue from higher-income individuals. We could see the scope of either income tax or national insurance (NI) expanding. For example, NI could be applied to earnings of pensioners, although recent announcements on the pensions triple lock could make this politically difficult. The Chancellor could also target asset holders by increasing levies on unearned income such as dividends or rental income although taxes have already increased on both of these sources of income in this Parliament.

KPMG Prediction: An extension of scope of NI to rental income or increasing tax on dividends are both unlikely as taxes have already been increased this parliament. Applying NI to the income of pensioners is also unlikely.

Pensions
 

Pensions tax relief is expensive. It cost the Government c. £55 billion in 2024/25 with most of the benefit going to higher earners.

Possible measures to raise tax could include introducing a flat rate of pensions relief, restricting the tax-free lump sum or reintroducing the lifetime allowance. It would raise significant tax revenue but is technically and politically difficult. 

Despite auto-enrolment many are still not saving enough for retirement, while some are arguably saving too much. Saving for retirement reduces the financial burden on the state but frequent changes to the pensions system create uncertainty for taxpayers.

KPMG Prediction: Unlikely to change – the time is not right.

International competitiveness
 

Whilst the UK remains attractive for many reasons, the Government could improve the UK’s tax competitiveness without significant cost.

Extending the Foreign Income and Gains (FIG) regime so that overseas income and gains are exempt for ten years instead of four would make the UK more aligned with other countries. It would also coincide with the time at which an individual’s worldwide assets become subject to Inheritance Tax. A ten-year window would give an overseas executive time to come to the UK, build a team and a succession plan, and exit before these aspects of the regime bite.

The Government could also look at the 10-year cliff-edge for IHT purposes and consider introducing a more tapered lead-in. 

KPMG Prediction: Tweaks to the FIG regime to make it more internationally competitive are fifty-fifty. But see below for our predictions on capital taxes, which is where we expect change is possible.

v. Taxes on Capital

Wealth tax

Wealth taxes continue to be debated but we think it highly unlikely the Government would introduce a general wealth tax. The evidence from other countries is that they are difficult to administer, don’t raise much tax and damage investor confidence. 

If the Chancellor wants to tax wealth more, this will most likely be through property tax and capital gains tax.

KPMG Prediction: No broad wealth tax.

Property taxes
 

The ‘mansion tax’ (the High Value Council Tax Surcharge) threshold could be reduced from £2 million to £1.5 million in England. This would mostly target housing in London and the Southeast and would not raise large amounts but if this is going to be a ‘picky’ Budget with the Chancellor having to tweak a lot of taxes to achieve his target tax revenue, then this is a possibility.

In the longer term we expect that Stamp Duty Land Tax (SDLT) and Council Tax could be abolished and replaced with a Land Value Tax in England. SDLT and Council Tax are overdue for reform, but the Prime Minister has ruled this out in the short term.

KPMG Prediction: Reducing the threshold for the ‘mansion tax’ may be tempting. More fundamental SDLT and Council Tax reform will have to wait for another day.

Capital Gains Tax (CGT)
 

CGT has been subject to the most speculation so far in the run up to the Budget.

HMRC’s own data shows that any significant increase to the rate of CGT will reduce revenues. Any attempt to equalise the rate of CGT with income tax would need to include some form of indexation or a form of tapering which applies reducing rates of tax to gains the longer the asset is held. This would arguably be fairer as only real gains would be taxed. It could also help simplify the system, avoid marginal behaviours and encourage long term holdings.

It will be important that any reforms give generous reliefs for genuine entrepreneurship and risk taking to ensure the UK remains competitive. We may hear an update on the Treasury’s call for evidence on how tax levers could be used to incentivise investment, help companies attract talent, and unlock the UK’s scale-up potential.

The impact of any changes on carried interest would also need to be considered; the carried interest regime has already been subject to change and further disruption would not be welcome.

Some think tanks are proponents of an exit tax on those that move abroad, but we think this unlikely. Whilst it might stem exits it could also reduce the number of incoming entrepreneurs and capital. It would also be complex to design and administer. 

KPMG Prediction: CGT reform likely with an increase in rates but some form of indexation relief or tapering. Exit tax is unlikely. 

Inheritance Tax
 

In the past Andy Burnham has proposed a 10% levy on all estates to fund social care. However, following his Party Conference speech, it seems that changes to social care and how they will be funded will take a slower path.

Some key figures would like to see the removal of the CGT uplift on death, which can eliminate CGT liabilities for beneficiaries who later sell inherited assets. 

A roadmap or some other form of clarity over the medium-term direction of travel on capital taxes could alleviate the trend for entrepreneurs and wealthy business owners to leave the UK prior to fiscal events.

KPMG Prediction: No rewrite of IHT yet. Removing CGT uplift on death is unlikely but may be looked at again in a later Budget.

vi. Indirect Taxes
 

Fuel Duty
 

In May the Government extended the 5 pence per litre (ppl) cut in the rates of fuel duty to 31 December 2026. With fuel prices remaining elevated and geopolitical uncertainty continuing we expect the cut will be extended.

Other increases to fuel duty have been repeatedly postponed since 2010-11 and we expect, in the current environment, that this will happen again.

At the time of writing, the pressure on the supply of diesel seems to have dissipated. Depending on how this develops a specific fuel duty cut for diesel might be considered.

KPMG Prediction: Fuel duty will be frozen and the 5ppl cut will stay for a further 12 months. 

VAT on electricity bills
 

The Prime Minister announced that VAT would be removed from electricity bills from 1 October 2026 until 31 March 2027. There may be calls for this to be made a permanent cut (possibly paid for by an increase to the Electricity Generator Levy), but we suspect that the Chancellor may choose to review the position when the cold weather is over. We do however recognise it is very difficult to take a tax relief away once it has been given and so VAT free domestic electricity may end up being a permanent feature of the tax system.

KPMG Prediction: No announcement at this Budget but longer term there is a high probability that VAT will be abolished from electricity bills permanently.

VAT refunds for tourists
 

The VAT Retail Export Scheme allowed overseas visitors to get a VAT refund on items bought in the UK. 

There has been heavy lobbying from retailers to reintroduce the scheme. Research by the Centre for Economics and Business Research found that, had the scheme been reinstated for 2025, it could have boosted Gross Value Added by up to £11.5 billion, supporting over 150,000 jobs. 

There might be some appeal to reintroducing the scheme as part of a package to support the high street, alongside targeted business rates and VAT reliefs as discussed above. It would also help compensate tourists for the Overnight Visitors Levy.

KPMG Prediction: Reintroducing VAT refunds for tourists – fifty-fifty.

vii. Devolution
 

Devolution is expected to be a central theme of this Budget, with the Government due to publish a devolution tax roadmap.

Recent announcements have already expanded local fiscal powers, including the introduction of an Overnight Visitor Levy and plans for mayoral areas to retain a greater share of business rates and income tax revenues. While full tax policy devolution is not currently planned, the Government is moving towards greater local control over revenue and spending decisions.

Further detail is expected when the roadmap is published.
 

Our insight

The UK remains one of the most centralised tax systems among developed economies, and greater devolution could support regional growth by giving local leaders more control over investment decisions and public services.

However, devolution is unlikely to deliver uniform outcomes across the country. Devolution will not lead to "growth in every postcode" and there will inevitably be winners and losers as regions compete for investment. That increases the importance of balancing local autonomy with support for areas that underperform.

Given the current fiscal environment, we expect the Government to adopt a measured approach. Nevertheless, devolution could prove one of the most interesting aspects of this Budget, particularly if the roadmap signals a move towards greater fiscal autonomy for mayoral regions. It remains possible that the Government uses the roadmap to signal a longer-term shift from revenue devolution towards elements of policy devolution.

It is possible that we could see something eye-catching. Perhaps the Government will do something radical and decide that a proportion of corporation tax should be determined locally (with a ‘federal’ corporation tax also in place) although the manifesto commitment to an overall corporation tax rate of 25% would need to be respected.