Market reaction
UK government bonds responded positively to the Budget, with gilt yields firmly lower on the day after some volatility due to the premature OBR release. While the 7 basis point drop (0.07%) in the 10-year gilt yield (longer-dated gilt yields fell more) is fairly modest in the grand scheme of things it was the largest decline on a relative basis on the day of a budget since 2006. To put this in perspective most budgets are near non-events for gilt markets, but it is reassuring nonetheless that there was a positive reaction. There was also modest upside in stocks and currency markets, with UK equities rising on the day along with sterling.
The rest of this report looks in more detail at the potential exposures and impact for UK markets, as a result of the more granular changes outlined in the budget.
Amisha Chohan, head of equity research:
Rachel Reeves announced that new listings in the UK will see a temporary holiday of three years on stamp duty reserve tax. These measures from the chancellor are aimed at stimulating the UK’s capital markets, but in reality, they will have a muted effect. Stamp duty on shares has often been one of those taxes that is forgotten about and consecutive chancellors have refused to reform it given its impact on the tax take. It means investments are effectively taxed twice if they are not held in a tax efficient product, with stamp duty taking effect on purchase and capital gains tax on exit. When you add in dividend tax, and potential inheritance tax liabilities too, the total take on shareholdings is significant.
The government is rightly looking at ways to boost the UK’s markets, but a much more effective reform would be to abolish it completely. Having a three-year holiday for new listings is unlikely to move the dial. Investors, particularly institutional ones, think in time periods of five years or in some cases far more. As such, while well meaning, it is unlikely to have a significant impact unless there is certainty it would not return. Furthermore, this does very little for companies already listed on the stock exchange. We are seeing companies move listings overseas or go private, and without further intervention this move isn’t going to prevent that. Going further and removing stamp duty on shares entirely would bring much greater certainty to UK markets and drive more overseas investment.
Richard Carter, head of fixed interest research:
The initial response saw bond markets welcome the Budget, with gilt yields falling across the curve. The premature release of Budget details by the OBR did cause some initial volatility but overall investors were buoyed by the news that Rachel Reeves has increased her fiscal headroom significantly to £22bn on the back of a number of different tax rises. The plans for gilt issuance, released by the DMO (Debt Management Office) after the budget statement, were also relatively benign with an increase of only £4bn by April.
Budgets can sometimes unravel in the days after the event and there might be some disquiet about a lot of the fiscal pain being backloaded to 2028 and beyond — just as the next election is likely to take place. The efforts to reduce inflation were also modest and there has been virtually nothing new done to try and raise the growth rate in the economy. That said, the OBR’s GDP growth forecasts are now more realistic so hopefully we will not face another big increase in taxes a year from now. Time will tell.
Equity research analysts:
Mamta Valechha, consumer discretionary analyst:
The announcement of a mileage-based tax for electric vehicles, while necessary, will have unintended consequences for the sector. As sales of electric vehicles (EVs) increased and sales of internal combustion engine cars fell, it made sense from a revenue raising point of view to replace the lost fuel duty and road tax. However, as the OBR notes, this new charge will dampen demand for EVs at a time where sales need to increase to meet government targets.
The tax changes make it clearly less appealing for anyone considering buying an EV and makes convincing people to make the switch more challenging. The government’s zero-emission vehicle (ZEV) mandate requires EVs to make up 80% of sales by 2030, with the proportion increasing each year up until then. Hitting that target will now become incredibly challenging given the OBR forecasts 440,000 fewer electric car sales to the end of the decade. As such manufacturers will have to respond by lowering prices, which will have a knock-on effect across the supply chain.
The impact is likely to be small for now, but given pressure to transition to EVs it could easily stall progress. The biggest loser in this will likely be the companies that are pure EV sellers, such as Tesla, although its UK exposure is less than 2% of revenues. Legacy car providers will have a smaller impact, but this does little to incentivise them to make the switch and look to boost EV production.
Oli Creasey, head of property research:
UK Housebuilders:
In the run-up to the budget, two potential housing policy changes were widely discussed. The first was a change to stamp duty and/or council tax, largely targeting high value homes. While this has partially come to pass, with a council tax surcharge on homes valued above £2m, there has been no change to stamp duty. This means that the direct impact on housebuilders should be limited, given very few sell properties above this price point. The other possibility was a return of the Help 2 Buy scheme, and while this was raised as an option by several building firms it hasn't come to pass. The probability of this policy being announced was relatively low in our view, but not zero, and so the lack of announcement comes as a slight disappointment for the industry and share prices.
Of greater consequence are the knock-on effects of the budget. The fortunes of housebuilders are closely linked to mortgage rates, and any reduction in interest rates would be good news for the industry. Initially interest rates fell modestly (though this may change in the days after the budget), providing a marginal benefit, but a relatively small one. On the flip side, the OBR forecast included a 155k drop in housing transactions per year by 2029, compared to the previous forecast in March 2025 (IE: still growing year-on-year, just at a slower rate than previously expected). Fewer transactions, driven by stamp duty changes, higher mortgage rates and an ageing population, are unlikely to be helpful for housebuilders.
UK REITs:
None of the headline budget policies have a strong impact on UK commercial property; the sector comes away relatively unscathed. While there is limited direct impact, commercial property values are closely linked to interest rates, and so the second order effect from other policies should be more relevant for the sector. The initial modest fall in interest rates provided a marginal benefit on those property values and hence REIT share prices, though this may change in the days ahead.
Will Howlett, banks and financial services analyst:
In the run-up to the budget, there had been a great deal of speculation that banks may face extra taxes given the fiscal hole faced by the chancellor and the sector’s recent bumper profits due to the higher interest rate environment. However, the banks’ arguments that they are crucial to supporting UK economic growth and already face incremental taxes in the form of the levy and surcharge won out.
The initial market reaction in terms of gilts rallying and sterling strengthening is also positive and suggesting the market can shift their focus to the sector’s healthy fundamentals. The banking sector seemed to welcome the Budget, closing up around 3% on the Day.
Less positive was the lowering of the OBR’s GDP forecasts, bringing them more in line with consensus but still representing a reasonable environment for loan growth. Also, more could have been done to promote growth and the fact that much of the fiscal consolidation is again pushed into later years raises some risks.
Sheena Berry, healthcare analyst:
Healthcare:
Whilst healthcare is an important area and there is a focus on investing in the NHS to help improve productivity and patient outcomes, UK exposure for pharmaceutical companies AstraZeneca and GSK is relatively small. Both companies generate less than 10% of group sales from the UK. The more important geographical region for large pharmaceutical companies is the US and as a result, initiatives coming from the US administration has more of an impact. This includes initiatives around drug pricing and Most Favoured Nation agreements.
Matthew Dorset, telecoms, aerospace and defence analyst:
Aerospace & defence:
There was little new news for the Defence industry in the Budget. As expected, the government reaffirmed its commitment to increase Defence spending to 2.6% of GDP by April 2026, and to 3.5% of GDP by 2035, in-line with the new NATO targets set in June 2025. This continues to underpin the growth opportunity for UK defence stocks, with beneficiaries including the likes of BAE, Babcock, and Qinetiq. We would also note that these companies also have significant exposure outside of the UK.
Telecoms:
The Budget provided some relief for BT. Firstly, full expensing for qualifying capital expenditure (capex) has been maintained. With BT continuing to significantly invest in public infrastructure and planning to rollout fibre past a further 5m homes this financial year, this will help to reduce its tax burden over the next few years. There were also fears going into the Budget that business rates for large properties would increase — BT already pays approximately £500m in business rates, largely for Openreach infrastructure. While an increase to rates for properties valued above £500k was announced, increasing BT’s rateable value by circa 10%, the multiplier applied has come down to 50.8p (from 55p previously), leaving BT’s business rates largely net neutral. Better than feared.
Phil Ross, insurance and utilities analyst:
Insurance – marginal negative headlines for some life insurers, but the reality could be positive
Insurance companies are rarely front and centre in Budget/taxation discussions and this year was no different. Limiting the National Insurance (NI) incentive on salary sacrifice pension contributions was rumoured before the event and confirmed on the day with a £2k tax-free limit. Workplace pension providers like Aviva, Legal and General, and Phoenix are likely to see some reduced inflows because of this change. But given that the rule doesn’t apply until 2029 it is still some way off – and inflows may actually rise in advance of this date for those looking to take advantage and lock-in the tax-free benefits. An additional consideration not addressed in the Budget is the current review of auto-enrolment rates, with an update – and expected increase – due to be announced in 2026, which would likely benefit those life insurers with workplace pension offerings.
Utilities – lower energy bills as levies shift to the tax-base
Again, actual announced changes on the day were much narrower than the pre-Budget speculation. The 5% VAT rate remains in place but the major change, which will result in lower energy bills in 2026-2029, is the switch of the renewables obligation scheme from energy bills to the tax-base. The government will refund electricity suppliers for 75% of this renewable energy subsidy which is reported to cut domestic bills by £88.
Other measures, including cessation of the ECO (energy company obligation) mean that bills should decrease on average by £150. This results in minimal-to-no-impact on energy companies but perhaps reduces social and political pressure on the narrative surrounding rising bills and affordability; indeed, these changes are forecast to reduce inflation by around 0.25% next year.
On a related note, the government has committed to further overhauling the process for energy infrastructure projects requiring access to the electricity grid. This should help to streamline access for the most important and well-developed power projects, limiting blockages and delays. This will be marginally positive for companies like SSE, National Grid, and Iberdrola, who are making sizeable investments in UK electricity infrastructure over the coming five years.
Lucy Rumbold, consumer staples analyst:
Food retailers:
The primary impact of the Budget on food retailers is the increase in the National Minimum Wage. We believe most companies had anticipated this change, so it is unlikely to come as a significant surprise or materially affect profitability. Over recent years, these retailers have consistently raised their cost-saving targets to create a buffer against potential cost pressures, leaving them well-prepared for such developments.
The other notable measure is the proposed £500,000 property tax threshold, which will increase costs for large-format stores. However, Tesco’s annual savings target of approximately £500m and M&S’s expected savings of around £120m annually should enable both companies to comfortably absorb these additional expenses without a major impact on margins.
Maurizio Carulli, energy and materials analyst:
Oil and Gas
The UK government maintained in the Budget the “windfall tax” on oil & gas producers (Energy Profits Levy) until 2030. Whilst widely expected, due to the need for extra tax revenues and the government’s strong commitment to the energy transition, the decision will continue to impose one of the most restrictive tax environments for hydrocarbon production in the world. When it was first introduced in May 2022, the tax was originally intended to temporarily tax the extra-profits of energy companies benefitting from the high level of oil and gas prices, following the Russian invasion of Ukraine. At that time, the Brent oil price benchmark was above $100 per barrel. Today it is below $65 per barrel, so the extra-profit is no longer there, and the measure should have been therefore repealed. In fact, the UK Office for Budget Responsibility (OBR) has itself cut by about one third the forecast for tax revenues coming from the “windfall tax”.
The current fiscal regime is severely constraining investments in the North Sea, is negatively affecting the UK supply chain and its employment levels, and is forcing operators to look abroad for new developments. Given the continued UK demand for gas (for domestic heating and electricity not provided by renewable energy) and oil (what still remains of the UK petrochemical and refining industry), one could perhaps have expected the Budget to at least accelerate the end of the Energy Profit Levy — even just from an “energy security” perspective. Furthermore, the majority of oil & gas producing countries do not impose such draconian fiscal regimes (and allow new exploration and development of hydrocarbon resources), and with forecasts for oil and gas demand showing significant levels of long-term demand, the current UK-only fiscal measures also reduce the efficacy from a global energy transition perspective.
A modest positive of the new Budget is that, from 2030 onward, the “temporary” Energy Profit Levy will be replaced by a new and permanent fiscal measure: the Oil and Gas Price mechanism (OGPM). In practice, this should cut the headline tax rate for hydrocarbon producers from about 78% today to a more reasonable 40% post 2030, under certain oil and gas price assumptions made by the government. This is a welcome development and provides improved long-term certainty. However, given the fact that it will start only after 2030 and that the UK North Sea oil and gas industry has already shrunk and will continue to shrink significantly because of the excessively tough fiscal environment, it might be too little too late. These changes should be implemented much sooner to provide some respite to the UK energy industry which is still an important part of the UK economy.
Finally, the government has also released the “North Sea Future Plan”, in recognition of at least some of the challenges facing the industry. In it, the government announced that existing licenses will be honoured, that extensions will be possible under certain circumstances, and that so called “Transition Energy Certificates” (TEC) will be introduced. These TECs will allow for the development of hydrocarbons in areas adjacent to existing licensed blocks. While new exploration is still not allowed, at least this new measure might provide for some limited future opportunities for the energy industry.
The listed oil majors like Shell and BP have nowadays a limited presence in the North Sea, but some of the smaller UK Exploration & Production operators, like Ithaca Energy, might view the new slightly improving measures as neutral to very modestly positive.
Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest. This document is not intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a security.
