The Institute for Fiscal Studies has noted that the £26bn of tax rises announced in the 2025 Budget take the UK’s overall tax burden to a record high. Anna Macdonald, Investment Manager at Aubrey Capital Management, looks at the questions this raises for investors and wealth managers, particularly around how to navigate a higher-tax environment and safeguard client portfolios.
The challenge facing the UK’s public finances is stark. Just 46% of households are net contributors to HMRC, yet demands on public spending continue to rise. Social benefits are expanding, defence budgets must increase, and the cost of servicing debt has escalated. Roughly a quarter of UK government bonds are index-linked, leaving the Exchequer unusually vulnerable to inflation which remains more persistent here than in many other European economies.
Long-dated gilt demand is also weaker than it once was. Defined benefit pension schemes, once a dependable buyer, are in decline. This leaves the UK more reliant on overseas investors to finance borrowing, a reliance that reduces flexibility and leaves policymakers sensitive to external sentiment.
For advisers, this environment can feel daunting. Clients understandably worry about tax changes, squeezed household budgets and gloomy headlines. But history shows that political turbulence often has less impact on long-term portfolios than is commonly assumed. Diversification across geographies and asset classes remains the best protection against fiscal uncertainty.
While the policy outlook is clouded, it would be wrong to dismiss UK assets altogether. Equities look inexpensive relative to history and peers, and active managers continue to identify mispriced opportunities. On the fixed income side, longer-dated gilts are offering interesting opportunities: their low coupons mean capital gains are possible if yields fall, and importantly those gains are tax free.
There is always growth somewhere in the world, even when conditions at home are challenging. For clients, the best safeguard against policy risk is global diversification.
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