UK Budget 2026: what tax measures were announced?

The chancellor, John Healey, announced tax incentives for entrepreneurs and employee share schemes in his maiden Budget on 28 October, alongside increases in selected taxes. He framed his Budget measures as providing breathing space for businesses and families while maintaining fiscal discipline, which he described as his first commitment as chancellor.

Personal taxes 

Capital gains tax 

In a departure from recent Budgets, capital gains tax (CGT) rates and the annual exempt amount remain unchanged, but the chancellor announced notable reforms to reliefs for entrepreneurs. To focus tax support on starting and scaling businesses rather than exits, the government will reduce business asset disposal relief (BADR) but introduce a new "founders' relief".

The BADR lifetime limit will fall from £1 million to £500,000 for disposals on or after 6 April 2027, limiting the lifetime tax benefit for higher and additional rate taxpayers to £30,000 at current CGT rates.

The proposed founders' relief, which is subject to a technical consultation closing on 30 November, would apply a 10% CGT rate to qualifying share disposals on or after 6 April 2027, subject to a £10 million lifetime gains limit per individual.

However, the proposed new relief is subject to much stricter conditions than BADR, relating to both the company and the founder, which are likely to materially restrict the availability of the new relief. The company must be a trading company or the holding company of a trading group, excluding certain trades such as land dealing, financial services and property development. It must also meet at least two of three tests relating to turnover, headcount and innovation.

Most restrictively, the founder must have held at least 25% of the company's ordinary share capital, with corresponding voting and distributable profit rights, when trading began and for at least five years before disposal. These conditions would make the relief narrower than BADR and its predecessor, Entrepreneurs' Relief, although they may change following consultation.

Employee incentives

Following the recent expansion of the enterprise management incentive (EMI) option regime, the chancellor has gone a step further by announcing improvements to the Company Share Option Plan (CSOP).

CSOP will be rebranded as EMI2 to reflect its use alongside EMI. Companies can use CSOP when they become too large for EMI or their activities make them ineligible.

From 6 April 2027, the individual limit for EMI2 will be doubled from the current CSOP limit of £60,000 to £120,000. The interaction between the EMI and EMI2 individual limits will also be removed, allowing eligible employees to benefit from the full limit under each scheme, meaning a maximum potential combined limit of £370,000. 

To reflect recent changes to EMI, the maximum EMI2 exercise period will also be extended from the current 10 years to 15 years. This change will also take effect from 6 April 2027 and will be included in the next Finance Bill. 

Further changes to EMI will take effect from 6 April 2027 to provide greater flexibility, including an extension of the EMI exercise window following the occurrence of a disqualifying event from 90 to 180 days. As previously announced, EMI options granted on or after 6 April 2027 will be reported through the EMI end-of-year return, rather than via separate notifications to HMRC, as is currently required for EMI options granted up until the end of this tax year.

Continued support for tax-advantaged option arrangements is welcome, given the significant benefits such schemes offer in incentivising employees and their role in the government's growth agenda.

VCT, EIS and SEIS

The government will introduce a small number of technical changes in Finance Bill 2026-27 to make the Venture Capital Trust, Enterprise Investment Scheme and Seed Enterprise Investment Scheme easier to use. It will also strengthen guidance and compliance activity relating to excessive fees and work with stakeholders to improve the Advance Assurance service.

Income tax for property and savings income

The government will increase the rates of income tax applicable to property and savings income by 2% from 6 April 2027, making the basic, higher and additional rates 24%, 44% and 49%, respectively.

Business and corporate tax

Banking tax surcharge

The banking surcharge, which is on taxable profits and payable in addition to corporation tax, will temporarily double from 3% to 6%. This is slightly lower than when first introduced in 2016. The higher rate will apply from 1 January 2027 to 31 March 2028, before returning to 3% on 1 April 2028.

Despite the doubling of the surcharge, the fact that the increase is temporary and not as high as some feared is some consolation.  

Capital allowances

In welcome news for capital investment, the government will increase the main rate first-year allowance to 50% for expenditure incurred on or after 1 January 2027, although less welcome is the reduction in the main rate writing-down allowance to 12%, with effect from April 2027.

The government has also published a summary of responses to its consultation on the tax treatment of predevelopment costs. It will work with stakeholders to explore improvements to HMRC guidance and legislation to clarify how the existing capital allowances rules apply.

Modernising the distributions framework

The government has published a summary of responses to the consultation on modernising the distributions framework, confirming that it will proceed with the proposals, subject to some changes to the policy design reflecting stakeholder feedback. Draft legislation will be published for technical consultation in 2027, with the changes taking effect from April 2028.

The reforms will impact how shareholders are taxed on distributions and will also affect corporate restructurings, including demergers and returns of capital by way of share buybacks. They will need careful analysis as the rules develop.

Sovereign tax status regime

The government has published a consultation on modernising the taxation of foreign sovereign investments in the UK, which closes on 20 January 2027. The proposals would bring sovereign investors’ income and gains from directly held UK real estate within the scope of UK tax for the first time. The consultation appears to build on HMRC’s earlier consultation on aspects of sovereign immunity, including a new proposal of lowering the tax rate on income and gains from 25% to 15% on investments through a Real Estate Investment Trust (REIT).

Taxation of UK-resident members of reverse hybrids including US LLCs

Following the government's summer consultation on the tax treatment of reverse hybrids, the government has published its response and concluded that it will pursue a credit-based relief mechanism rather than matching transparent treatment of foreign jurisdictions. The government is proposing a further technical consultation before legislating in the next Finance Bill and claims for credit are expected to be available from early 2028.

Indirect taxes

Stamp taxes on shares

Although confirmation had been expected on the implementation date for the new Securities Transfer Tax, which will replace Stamp Duty and Stamp Duty Reserve Tax, the published documentation suggests that it will now take effect from "late 2027", through a commencement order.

VAT on private hire vehicle services

From 2 January 2028, the government will change the VAT treatment of taxi and private hire passenger transport services supplied through an agent. For VAT purposes, these services will be treated as supplied by the agent rather than the driver, requiring private hire vehicle operators (PHVOs) within the scope of the new rule to charge VAT on the full fare. The rule will apply only to businesses whose annual fare turnover exceeds a specified threshold, proposed at £50 million, subject to consultation.

The tax and regulatory treatment of PHVOs has been the subject of several legal challenges in recent years, creating uncertainty across the industry. Applying VAT to services supplied through platforms should largely resolve that uncertainty, but will come at a cost to consumers already under financial pressure. The proposed £50 million threshold could also distort the market by encouraging smaller operators to remain below it to retain a competitive advantage.

VAT online marketplace liability extension

Following the government's earlier consultation, it will extend VAT online marketplace liability rules to UK businesses from October 2027. Online marketplaces will be responsible for collecting VAT on sales by UK VAT-registered businesses and any other UK business with a minimum annual sales threshold per platform of £90,000. These rules will not apply to personal sales by those not in business or to business-to-business transactions.

The rules are a significant extension of VAT liability for online marketplaces and will have wide operational and compliance implications for those platforms and the UK businesses that use them.

Gaming duty

Following last year's increase to gambling duties, the chancellor will increase the rate of Machine Games Duty for higher stakes machines (those with a maximum charge to play of more than £1 or a maximum prize of more than £100) from 20% to 25%. 

Real estate taxes

VAT on land for social housing

Following HMRC's consultation on the VAT treatment of land intended for the construction of new social housing, which closed over the summer, the government confirmed the introduction of zero-rating at an earlier stage of development in specific circumstances, as expected. Secondary legislation is expected to include the technical detail on the precise qualifying provider definition, mixed-use and conditional-sale treatment and the interaction with existing arrangements and transitional rules.

Business rates

In welcome news for the high street, the previously announced business rates relief for pubs, social clubs and many live music venues in England from 1 April 2027 will increase from 15% to 35%. On the same date, the rateable value threshold for 100% business rates relief for retail, hospitality and leisure will rise from £12,000 to £18,000.

Osborne Clarke comment

The tax measures announced in the Budget offered encouragement for business growth and entrepreneurship. The accompanying publications, including new consultations and responses to earlier consultations, contained extensive technical detail across a wide range of taxes. These materials will require careful review, but offer insight into the government's future tax policy direction.