Striking a balance: Financial services and the Budget

Later this month, John Healey will carry the infamous red briefcase for the first time, for the first Budget of the Burnham premiership. Pre-budget speculation is rife, and with it the inevitable activity in betting markets. At the time of writing, Polymarket rates the likelihood of a CGT increase at 47% and the introduction of a wealth tax at 8%.

Beyond the rumours and reports, however, the Budget’s impact on financial services ultimately depends on whether the government sees financial services as a growth engine or revenue source, and whether its role as both can comfortably co-exist.

The Budget is expected to contain measures directly aimed at financial services businesses. Most notably, this includes a possible windfall tax on banks, or targeted measures such as a temporary restriction on the ability to use carried forward losses. The government has not ruled out such measures. Many industry leaders have warned about the impact on lending and competitiveness and, as a consequence, such measures could ultimately harm growth.

Elsewhere, the Chancellor could be tempted to relook at the reformed carried interest regime and consider whether the recent changes remain appropriate, particularly where the headline rate of CGT is increased. Further reform in this area will have a knock-on impact on competitiveness, as well as being a further change financial services businesses need to address.

The Chancellor could also lean on financial institutions in relation to the reporting of tax data to improve compliance and close the tax gap.

These measures are likely to be high on the Chancellor’s agenda because they are, at least initially, tax-revenue generative and unlikely to be unpopular with the broader electorate. However, whether the introduction of such measures can be balanced with the growth objectives is the key question. Investment and talent are mobile, and disincentives to locate and grow financial services businesses in the UK will ultimately damage growth and harm tax revenues.

Financial services businesses should be prepared to consider the direct impacts and how this will feed into budgets, cash-flow forecasts and lending arrangements. The impact of any new reporting measures will need consideration from a data and technology perspective, as will how requirements feed into current operating models and processes.

Elsewhere, there is likely to be a longer list of measures that do not specifically target the financial services sector but could significantly impact it nonetheless.

The government has already announced that it will not break its manifesto commitments, so that headline rates will not increase across the major taxes. This makes increasing capital gains tax an obvious target, albeit one where some commentators and reports challenge whether it will raise tax revenues. The introduction of an exit charge, another area of speculation, would be a major change to the UK tax system.

Such changes would be likely to make the UK a less attractive jurisdiction for talent. In this event, entrepreneurs and senior talent currently located in the UK could leave, and non-UK residents may think twice before relocating or investing here.

Fund managers that have recently faced changes to the carried interest tax regime are unlikely to respond positively to changes that would tax fund co-investments at a higher rate.

The impact of CGT reform is unlikely to be limited to the amount of tax ultimately paid. Changes in investor behaviour, holding periods and investment structures may prove equally significant. From a financial services perspective, this could influence both product design and demand, with firms needing to evaluate whether existing offerings remain aligned to client objectives.

Growth and investment are, as ever, expected to be key themes of the 2026 Autumn Budget. Possible policy developments include expanding the remit of the National Wealth Fund, creating new public and private joint investment initiatives, and further pension reform in line with the Mansion House Accord. There may be rhetoric and policies directed at encouraging UK listings, leading the adoption of AI, and developing fintech and cryptocurrency (including stablecoins).

It remains to be seen if there will be significant developments directly aimed at supporting the financial services industry. While new incentives and initiatives invariably attract attention, many financial services businesses may place equal value on stability. Long-term decisions around investment, product development, location of functions and deployment of capital are often made over multi-year periods. Frequent changes to the tax landscape can create uncertainty at precisely the time the Government is seeking additional investment and growth.

In recent years, the Treasury has focused on asset management as a priority sector, with developments including the qualifying asset holding company and introduction of the Reserved Investor Fund regime. It is unclear whether the new Chancellor sees this work as complete, or whether new measures will be announced to maintain and grow the UK’s position as a funds centre.

Policy design aimed at reforming and unlocking growth opportunities for banks is likely to come with political costs, and, if measures are announced, it will be interesting to see how these are balanced against a possible tax on windfall profits.

The Chancellor is well aware that the tax measures could impact the success of the growth agenda, and this will be a difficult balancing act. For example, even if the UK attempts to become a more attractive jurisdiction for financial services and listings, it may not generate the pull-through of economic growth if it becomes unattractive to talent.

If growth measures are announced, they are likely to create financing, investment and product opportunities for FS businesses. If pension reform succeeds in directing a greater proportion of institutional capital towards UK infrastructure, private markets and growth assets, the impact will extend beyond investors. Asset managers, lenders, custodians and advisers may all benefit from increased activity, while competition to attract and deploy into those assets is likely to increase.

Alongside the headline measures, we may see an update on several live consultations and other tax technical developments. This may include updates to HMRC’s consultations on distributions, withholding taxes and US LLCs. There may also be minor technical updates relevant to the Qualifying Asset Holding Company regime.

While not headline-grabbing, a package of measures that simplifies tax arrangements for financial services businesses and investment structures would be well received. However, it would be concerning if the impact on investment structures has not been fully thought through and could harm the UK’s attractiveness to asset managers, investors and other financial services businesses.

Taken individually, many of the measures discussed may appear manageable. The more important question is the cumulative effect.

Financial services businesses are likely to consider the package as a whole when assessing the UK's attractiveness as a location for capital, investment activity and talent. In that context, seemingly minor technical changes may have a greater practical impact than headline announcements.