UK Budget 2025: Key Takeaways and Market Reaction

Live Update: Wednesday 26 November 2025

Market Highlights

• Sterling: Climbed to daily highs vs. USD, reflecting investor approval.
• Bonds: Yields fell after the announcement of £22bn in fiscal headroom, boosting confidence in government finances.
• Stocks: FTSE 100 and FTSE 350 rose, but sector performance was mixed.

Stock Market Winners and Losers

While overall indices are higher, some sectors are struggling:

• Homebuilders: Hit by the announcement of the mansion tax (effective 2028), though likely short-term impact.
• Consumer stocks: Weighed down by frozen income tax thresholds, potentially limiting disposable income.
• Public spending: Increased spending, including welfare, may appease left-wing Labour MPs, potentially reducing calls for additional taxation next year.

Tax Measures Overview

The Budget includes broad tax changes:

• Freezing of income tax thresholds for three years
• Higher gambling taxes
• Dividend tax increased by 2%
• Mansion tax on properties over £2m (from 2028)
• EV and hybrid vehicle tax per mile (from 2028)
• These measures will push the UK’s tax burden to 38% of GDP by the end of this Parliament.

Borrowing and Spending

• Near term  borrowing rises to £138.3bn for 2025/26, up from £117.7bn forecasted.
• Spending is projected to increase by £11.8bn by the end of the Parliament.
• Tax increases are largely back-loaded, with £0.7bn raised next fiscal year and £26.1bn by 2029-30.
• The government is avoiding immediate spending cuts but may increase borrowing in the short term, which could impact taxpayer sentiment.

Growth and Real Income Outlook

• GDP upgraded slightly for 2025 but expected to decline afterward.
• Real income growth may stagnate by 2027-28 due to frozen tax thresholds and higher employer national insurance contributions.
• The OBR warns that stagnant wages and tax increases could suppress consumption, challenging economic growth forecasts.

Other Key Measures

• National insurance on salary sacrifice pension contributions above £2,000 annually.
• Cash ISA allowance remains £20k until April 2027; pensioners retain full allowance, while younger savers must invest £8k in stocks and shares.

Overall, markets have welcomed the Budget, relieved that the Chancellor secured fiscal headroom and avoided immediate crises. However, challenges remain: sluggish growth, higher taxes on households, and political fragility could impact the UK economy and government popularity. The long-term test will be whether the economy can rebound amid these fiscal measures, and whether tax increases on households will hinder consumption.

Preview 

Sterling and Market Expectations

As the 12pm Budget announcement on Wednesday approaches, markets are already reacting. Sterling, which has been relatively stable recently, slipped below $1.31 in early Monday trading. While not dramatic, this movement signals investor caution.

Analysts note that if the government’s fiscal strategy raises doubts, UK bond yields could rise as investors demand higher compensation for perceived risks. Higher yields generally put downward pressure on the pound, meaning further sterling weakness is possible if confidence in the Budget falters.

Political Uncertainty Adds to Market Volatility

The political backdrop only intensifies uncertainty. Proposals ranging from inheritance tax changes, wealth taxes, to pension reforms have been floated and then withdrawn amid internal pushback. With narrative control fragmented, the final Budget package could hold surprises for both investors and the public.

Markets tend to react strongly to uncertainty, and the current political climate suggests volatility could follow the announcement.

Key Risks for UK Assets

The central risk is clear: what if the Chancellor fails to convince investors? A Budget heavily reliant on tax increases without a credible growth plan could trigger market instability. Potential impacts include:

• Sterling: Further downward pressure
• UK government bonds: Rising yields and volatility
• Domestically-focused equities: Potential underperformance

While this isn’t necessarily a crisis scenario, market credibility is crucial. Investors will scrutinise whether Labour’s strategy can deliver sustainable growth alongside higher public spending.

Why This Budget Matters

This Budget could shape not just the next 12 months, but the broader economic and political trajectory of this Parliament. From tax policy to public investment, the implications are wide-reaching.

For those looking to follow the announcement live, XTB UK will provide a full Budget livestream at 14:00PM GMT, with detailed post-Budget analysis once the Chancellor delivers her statement.