The UK has its own financial institution. The Chancellor of the Exchequer Rachel Reeves, after a long wait, presented the 2026 Budget in Parliament on 26 November. A Budget worth £22 billion (above the £15 billion budgeted), which introduces a tax increase and will impact the majority of the British population. But what was and what will be the reaction of the markets?
Market reaction positive for now
A Budget which, according to PGIM analysts, fails to achieve the objective of regaining the trust of both the market and Labor parliamentarians, even if the market reaction was positive: the London Stock Exchange gained around 1%, while Gilts (British government bonds) rose again, pushing the relative yield downwards, and the pound appeared stronger against the dollar and the euro.
“The main uncertainties that remain are linked to the fact that the tax increases are concentrated in the second part of the year; therefore, the revenues will only occur in the future; the growth hypotheses have been revised downwards, but still remain very optimistic, settling at around 1.5% after 2027”
explains Guillermo Felices, Global Investment Strategist for Fixed Income at PGIM, adding that
“From a political point of view, we are not sure that the government has done enough, especially after the freezing of tax thresholds. These uncertainties could easily come back to weigh on the Gilt market in the coming months.”
Rating will depend on effectiveness of tax package
“Whatever the UK’s fiscal flexibility, the performance of the rating will also depend on the effectiveness of the proposed fiscal consolidation package”
notes Scope Ratings, adding
“Political stability will remain a key concern, as tax rises represent a departure from the Labor Party’s pre-election promises.”
Furthermore, for the European rating agency,
“the rating trajectory will also depend on the potential impact of the proposed fiscal measures on inflation and the Bank of England’s ability to lower the key rate (currently at 4%)”.
PIMCO economist Peder Beck-Friis also agrees that markets will now be able to focus again on inflation, the labor market and the likelihood of further rate cuts by the Bank of England.
“We remain of the view that a weakening labor market and falling inflation will result in a deeper cycle of rate cuts than markets are pricing in and, by helping to reduce inflationary pressures next year, the budget law has further strengthened these dynamics.”
The measures that impact the stock market
Among the measures announced by Reeves there is also a three-year exemption from stamp duty (a 0.5% tax that investors pay when purchasing shares) reserved for newly listed companies. Despite the incentive, the 0.5% stamp duty makes investing in UK-listed shares less competitive than buying shares on the New York and Frankfurt markets, although it should be noted that the London market offers a “wide range of opportunities”, with “UK shares still trading at lower multiples.
Taxes on savings facilitate investments
Tax breaks on savings are also being reformed, in an attempt to encourage investment in the British market. The deposit in current accounts, which is currently tax-free up to the threshold of 20,000 pounds, from April 2027 will be tax-free up to 12,000 pounds for those under 65. A measure that aims to encourage young people to invest rather than save.
Highest taxed properties
Finally, the UK government is studying a new tax structure on property income already subject to income tax. From April 2027, the basic rate on property will be 22%, the increased rate will be 42% and the additional rate will be 47%. In addition to the increase in property income taxes, the so-called “Mansion Tax” will be introduced from 2028, meaning homes worth more than £2 million will be subject to an increase of between £2,500 and £7,500 per year, depending on the valuation of the property. According to Fidelity, approximately 150,000 households could be affected by the Mansion Tax.
