Budget 2026 and your borrowing capacity: how the changes flow through to a Southampton business mortgage

If you own a trading business in Southampton and want to buy, refinance or extend the premises you work from, the Budget matters for one reason above all: lenders size a business mortgage on trading profit. Budget 2026 changes wage costs, business rates, energy and fuel bills and the tax treatment of plant spending, and each of those changes moves profit up or down. This piece, from Business Mortgages Broker, follows them through to the debt service cover test that decides how much you can borrow.

How a lender decides how much you can borrow

For an owner-occupier business mortgage, the lender is not mainly lending against the rent a building could earn. It is lending against the business that occupies it. The core test is debt service cover: annual trading profit, usually measured as EBITDA (earnings before interest, tax, depreciation and amortisation), divided by the annual loan repayments of capital and interest. Lenders typically want that ratio comfortably above 1, and they often work out the repayments at a stressed interest rate rather than the rate you will actually pay.

Two consequences follow. A change that adds to costs reduces the maximum loan, often by more than the cost itself suggests, because the lender wants headroom on top. And a change that only affects tax, not EBITDA, may not move the cover figure at all, even though it changes the cash your business keeps.

Wages: the National Living Wage rise

The biggest cost change for many Southampton employers is the minimum wage. On 1 April 2027 the National Living Wage rises by 3.9% to £13.21 an hour, the rate for 18 to 20 year olds rises by 3.9% to £11.27 and the rate for 16 to 17 year olds and eligible apprentices rises to £8.31 (Budget 2026, para 6.128). The Treasury puts the increase at £910 a year in gross earnings for a full-time worker on the National Living Wage (para 3.18).

For warehouse and port-side logistics operators around Nursling and Adanac Park, retailers in Shirley and Bitterne, and hospitality businesses in Ocean Village and Bedford Place, that is a direct cut to EBITDA unless prices or productivity rise to match. Employer costs on top of gross pay add to it. The Budget says only that there is no increase to the headline rates of National Insurance contributions (Budget 2026, executive summary), so plan on the basis of your current employer on-costs.

There is some help for hiring. The Budget confirms a £3,000 Youth Jobs Grant for businesses hiring eligible young unemployed people and a £2,000 apprenticeship hiring payment for new young apprentices taken on by non-levy paying employers in England (para 5.22). These are one-off payments, and lenders will usually strip one-off income out of the profit they lend against.

Business rates: relief for shops, cafés and pubs, a supplement for others

Rates are a fixed cost that sits above EBITDA, so relief adds directly to the figure a lender tests. The changes are focused on retail, hospitality and leisure (RHL) property in England, all from 1 April 2027:

• Small Business Rates Relief for RHL property. The threshold for 100% relief rises to a rateable value of £18,000 and the threshold for tapered relief to £21,000, up from £12,000 and £15,000 (para 6.190). A qualifying café or independent shop with a rateable value of, say, £17,000 gets no small business relief today; from April 2027 it gets 100% relief.
• A two-year real-terms freeze. Bill increases for qualifying RHL properties are capped by CPI inflation in 2027-28 and 2028-29 (para 6.191).
• Pubs and live music venues. Relief rises from 15% to 35% for pubs, social clubs and all but the largest live music venues (para 6.189).

If your premises are a warehouse, workshop, marine engineering unit or office, the news is different. The higher small business thresholds apply only to qualifying RHL property, and the 1p Transitional Relief Supplement is extended for two years from 1 April 2027, paid by ratepayers whose bills rose by less than the transitional caps or fell (para 6.193). That is a small extra cost rather than a saving. One helpful change applies to everyone: the £150 and £300 Valuation Tribunal fees for rating appeals in England are abolished, with fees already paid on 2026 list appeals refunded (para 6.194).

Energy and fuel: help with an end date

Southampton's freight and distribution businesses will notice the fuel measures. The 5p fuel duty cut is extended to 1 July 2027 (para 3.13), the 3.7p red diesel cut runs to the same date (para 3.15) and the HGV Vehicle Excise Duty holiday at £1 runs to 30 June 2027 (para 6.200). All three are temporary. A lender looking at a forecast for 2027-28 will expect you to show fuel at the full rate from July 2027.

Manufacturers, including marine and engineering firms, should check the British Industrial Competitiveness Scheme, which from April 2027 will cut electricity bills by up to 25% for over 10,000 eligible manufacturers in Great Britain (para 4.24). The Climate Change Levy main rate on electricity is then frozen from 1 April 2028 (para 6.209).

Corporation tax and capital allowances: cash, not EBITDA

The headline rate of Corporation Tax is capped at 25%, and full expensing is maintained (para 2.54). From 1 January 2027 the main rate first-year allowance rises from 40% to 50%, and from 1 April 2027 the main rate writing down allowance falls to 12% for Corporation Tax (para 6.251 and para 2.54).

These measures change how much tax you pay and when, which affects the cash left after tax. They do not change EBITDA, so on a pure EBITDA cover test they leave borrowing capacity where it was. They matter in lender cash flow checks that look at profit after tax, and in your own planning: new plant brings more relief up front, while a large existing pool gets less relief each year at 12%. The Budget does not spell out which assets the higher first-year allowance covers, so check with your accountant before relying on it.

Illustrative example: a Southampton logistics business

Illustrative example. The figures below are invented to show the method. They are not a quote and do not reflect any lender's criteria.

A haulage and warehousing company near the M27 reports EBITDA of £520,000. It has a business mortgage on its yard and warehouse with annual repayments of £260,000 at the lender's stressed rate.

• Debt service cover today: £520,000 divided by £260,000 = 2.00 times.

Now add two Budget effects for 2027-28. Forty staff on the National Living Wage each cost £910 more in gross pay, a total of £36,400 before employer on-costs. The fleet uses 400,000 litres of diesel a year, so the end of the 5p fuel duty cut from July 2027 adds about £20,000 a year once it runs a full year. The warehouse is not RHL property, so no rates relief applies.

• Adjusted EBITDA: £520,000 minus £36,400 minus £20,000 = £463,600.
• Debt service cover: £463,600 divided by £260,000 = 1.78 times.

The existing loan is still well covered. But suppose the company wants to buy a second unit and the lender requires cover of 1.4 times. Before the changes, the maximum annual repayment the business could support was £520,000 divided by 1.4, about £371,400. After them it is £463,600 divided by 1.4, about £331,100. That is roughly 11% less borrowing capacity, from cost changes that look modest on their own.

Run the same exercise for a café in Portswood moving into 100% small business relief and the effect goes the other way: the rates bill drops out of costs and the cover ratio rises.

The wider backdrop

The Office for Budget Responsibility expects inflation to peak at 3.8% in the first quarter of 2027 before returning to the 2% target by the third quarter of 2028 (para 1.37), and the Budget notes that higher inflation has led to higher interest rate expectations (para 1.15). It gives no forecast for Bank Rate. For borrowers, that means stress rates are unlikely to ease quickly, which keeps the focus on profit.

What to do now

1. Rebuild your 2027-28 forecast. Put in the April 2027 wage rates, fuel at the full rate from July 2027 and any rates relief you qualify for.
2. Check your rateable value. If you run RHL premises, see whether the £18,000 and £21,000 thresholds bring you into relief.
3. Work out your cover ratio before a lender does. Divide EBITDA by annual repayments, then test it with costs up and with a higher interest rate.
4. Separate one-off items. Hiring grants and catch-up payments help cash, but lenders will usually exclude them from sustainable profit.
5. Time plant spending with your accountant. The 1 January 2027 and 1 April 2027 dates affect tax relief, not EBITDA.
6. Approach lenders with the story ready. A short note on how the Budget affects your margins answers a credit team's first question.

Key dates

• 1 January 2027: 50% main rate first-year allowance for expenditure on or after this date (para 6.251)
• 1 April 2027: National Living Wage rises to £13.21 (para 6.128); RHL rates thresholds rise to £18,000 and £21,000 (para 6.190); pubs relief rises to 35% (para 6.189); main rate writing down allowance falls to 12% for Corporation Tax (para 6.251)
• 30 June 2027: HGV VED £1 holiday ends (para 6.200)
• 1 July 2027: fuel duty and red diesel cuts run to this date (paras 3.13 and 3.15)
• 1 April 2028: Climate Change Levy main rate on electricity frozen (para 6.209)

Brought to you by Business Mortgages Broker

Business Mortgages Broker arranges owner-occupier business mortgages for UK trading companies, from port-side logistics firms to high street retailers. Founder Matt Lenzie has 25 years in financial services, raising debt and equity, and has arranged around £400m of property finance. To see how lenders assess trading businesses buying their own premises, read about owner-occupier business mortgages in Southampton.

Source: HM Treasury, Budget 2026 (HC 726), 28 October 2026. This article is general information, not tax or financial advice.