With the Chancellor expected to announce a tough but strategic Budget next week, the UK construction sector is watching closely. Early signals from government point towards a combination of tax changes, adjustments to public spending and targeted interventions aimed at stabilising the economy while addressing pressures around the NHS, living costs and national debt. Although the full detail will be confirmed at the end of the month, the direction is becoming increasingly clear and the implications for construction in 2026–2027 will be significant.
A Fiscal Tightening That Will Affect Project Funding
Government has committed to two strict fiscal rules: not borrowing for day-to-day spending and ensuring debt falls as a share of GDP by the end of the Parliament. With an estimated £20bn gap in the public finances, the Budget is expected to lean on revenue-raising measures and targeted cuts. For construction, this means capital spending will likely become more selective, with resources redirected into politically essential sectors such as housing, energy, transport and healthcare. While discretionary or lower-impact projects may face delays, major infrastructure, safety-driven programmes and regeneration schemes are expected to remain protected.
Pressure on Workers and Employers
If the freeze on income tax and NI thresholds is extended, more construction workers will be pushed into higher tax bands as wages continue to rise. This results in reduced take-home pay for staff, increasing pressure on employers to offer wage uplifts in an already competitive labour market. The combined effect is likely to increase labour costs and intensify the struggle to retain skilled workers in 2026–2027, particularly in trades where shortages are already severe.
Pension and Salary Sacrifice Reform
A potential cap on tax-efficient pension contributions through salary sacrifice schemes would raise NI costs for both employees and employers. For construction firms (especially mid-sized contractors) this could complicate retention strategies for senior staff and technical specialists. Higher payroll costs may also influence recruitment decisions and increase competition for skilled workers across engineering, project management and digital roles, where demand is already outpacing supply.
Property Tax Reform
Possible changes to property taxation, including higher charges for high-value homes and broader NI obligations for landlords, could reshape the residential market in different ways. Wealthier homeowners may delay or reconsider refurbishment and redevelopment plans, reducing some private-sector activity. At the same time, increased tax revenues and greater focus on fairness in property taxation may create conditions for fresh investment in affordable housing, estate regeneration and publicly funded programmes. The net effect is likely to shift construction activity toward lower- and mid-market housing and away from premium residential schemes.
Electric Vehicle Taxation and Logistics Costs
A potential mileage-based tax for electric vehicles could increase operating costs for contractors who have transitioned to EV fleets to meet sustainability expectations. This affects site logistics, plant transport, van fleets and low-emission delivery models used by material suppliers. Any new EV cost structure introduced in 2026 could force contractors to revise pricing, adjust fleet strategies or renegotiate sustainability commitments tied to framework agreements.
Energy VAT Adjustments
If the government reduces VAT on domestic energy or cuts certain regulatory charges, there could be a small but meaningful reduction in energy-related costs for construction sites and manufacturing operations. Temporary power, prefabrication facilities, and materials production (especially steel, concrete and gypsum) could all benefit from lower energy overheads. While not transformational, any downward pressure on energy pricing will help offset tight margins across the industry.
Youth Employment Guarantee
A new employment scheme for young people out of work for 18 months could be a timely opportunity for the sector. With persistent labour shortages in trades, digital design, site operations and sustainability roles, construction could benefit from a fresh talent pipeline entering the industry. If structured effectively, this initiative may provide contractors with a steady stream of early-career workers at a critical time for the sector’s long-term capacity.
Two-Child Benefit Cap Changes
If the government adjusts or removes the two-child benefit cap, household financial stability for low-income families could improve, potentially reducing homelessness pressures and increasing demand for social housing allocation. For construction, this indirectly translates into renewed urgency for councils to accelerate the development of affordable homes, temporary accommodation replacements and regeneration projects aimed at reducing overcrowding.
How the Budget May Reshape Construction Demand (2026–2027)
Rising social housing demand, political pressure and potential tax reform all point towards a stronger focus on affordable housing delivery, making 2026–2027 a likely period of accelerated investment in council-led and housing association schemes. Regeneration and brownfield development will remain central, especially in boroughs facing acute waiting list growth. Core infrastructure projects (transport, hospitals, energy and water) are expected to remain protected due to their strategic importance. The private residential market may soften at the high end but strengthen in the mid-market. Overall, contractors will be operating in a period where demand is healthy but margins remain under pressure, making cost discipline and strong planning essential.
This year’s Budget will not be an easy one, but it is shaping up to be a strategic reset that clarifies the government’s priorities. For construction, the message is clear: housing, regeneration, energy transition and essential infrastructure will dominate the next two years. Firms aligned with these priorities and confident in managing rising labour and compliance costs, will be best positioned to grow. For the wider industry, 2026–2027 will be defined by tight budgets, ambitious public programmes and a major reorientation toward long-term, socially driven development.
This shift also means that publicly funded construction work will concentrate around the sectors with the highest social and economic return. Projects linked to affordable housing, estate regeneration, hospital upgrades, school improvements, transport modernisation and energy infrastructure are the most likely to receive support. Schemes that address building safety, net-zero compliance and long-term community value will move to the front of the queue, while discretionary commercial developments may face slower approvals or tighter viability tests.
Contractors should be prepared for more rigorous financial scrutiny, stronger social value requirements and a higher emphasis on low-carbon delivery models. Frameworks will demand clearer cost forecasting, stronger digital reporting and demonstrable capability in areas like MMC, material efficiency and supply chain resilience. Firms that can deliver faster, safer and more sustainably (while maintaining strict cost control) will be best placed to secure work in the new funding landscape.
