Business on Edge as UK Budget 2025 Looms
UK businesses feel anxious. Next week, Chancellor Rachel Reeves unveils her Budget.
Boardrooms are nervous; confidence is fragile.
Last year’s Budget hit firms with a £25bn National Insurance rise and a steep jump in the minimum wage.
The economy barely grew last quarter and inflation still stings. Now companies wait, hoping for stability.
Bullet Point Summary
Tax hikes loom: UK Budget 2025 follows a year of heavy business tax increases, and firms hope for no new surprises under Chancellor Rachel Reeves.
Economic drag: Analysts say the Budget will raise net taxes, which may trim GDP growth by about 0.2%. The Bank of England may cut interest rates to offset that drag.
Tax strategy: One or two broad measures are expected rather than dozens of small levies. Business groups call for stability, preferring a few big changes instead of many little taxes.
Business rates: Permanent discounts for retail and hospitality could be made official, smoothing out sudden cost jumps. A new Planning and Infrastructure Bill is touted as a big boost for growth.
Wages and pensions: The national minimum wage is likely to rise again, helping low-paid workers. Capping tax-free salary sacrifice pension schemes would cut future employer pension contributions.
Employment law: The new Employment Rights Bill will give new hires immediate sick pay and unfair dismissal rights. Businesses warn this could make hiring slower and more expensive.
Outlook: Many firms say they have delayed big investments until after the Budget. If no harsh surprises arrive, pent-up investment and hiring may finally kick in.
Background
Since last year’s Budget, UK fiscal policy has taken a sharp turn. Chancellor Reeves’s first Budget imposed major tax hikes. National Insurance was increased by £25 billion, adding to employers’ bills. The government also pushed the national minimum wage far above inflation. Corporate tax is set to rise to 25%, meaning companies keep less of their profits. These moves were meant to repair public finances, but they left many businesses squeezed by higher costs and thinner profit margins.
The broader economy has struggled as well. Inflation spiked after the pandemic and only gradually fell to about 3–4% by late 2025, still above the Bank of England’s 2% target. The Bank raised interest rates to multi-decade highs, making loans and mortgages expensive.
GDP growth has stalled and the economy barely expanded. Wage growth has been strong but mostly kept pace with prices, so many households still feel worse off.
Business sentiment is fragile. Surveys of executives show widespread gloom. Many firms have put off investment until after the Budget. Industry groups warn companies need stability to grow. The head of the CBI urged one or two broad tax rises, not a thousand small ones, to avoid endless new burdens. In short, businesses want a clear plan and fewer surprises. This is the backdrop to Budget 2025 – a time of squeezed wallets and cautious investment.
Core Analysis
For tax strategy, the government faces a tough trade-off: public debt is high and revenue must be raised, but broad tax hikes could choke fragile growth. Most forecasts see the Budget pulling net money out of the economy and shaving around 0.2 percentage points from GDP in 2026. To soften the blow, the Bank of England is likely to cut interest rates soon, making borrowing cheaper. Officials note inflation is expected to fall next year. The Chancellor will highlight those positives, focusing on a steady recovery and lower inflation.
Business rates and sector support are top priorities. Business rates bills hit many firms hard after the pandemic discount was cut. Retailers, pubs and small manufacturers saw their rates almost double. To ease this, the Chancellor could make pandemic-era relief permanent or smooth out the steep increases when a firm expands. Any such fix might be paid for by hiking rates on very large properties, letting small businesses bear a lighter burden.
Outside taxation, the government has proposed other relief. The Business Secretary pledged to cut electricity bills for around 7,000 small firms, lowering one major cost. Officials will stress a new Planning and Infrastructure Bill, which ministers say will remove barriers to investment and speed up approvals for homes, factories and energy projects. The British Business Bank is set to target new lending at a handful of high-growth sectors such as technology, green energy and biotech. These moves aim to spur enterprise and growth.
On other taxes, plans are mixed. A new levy on bank profits has been floated but is seen as harmful to investment, so the Treasury may quietly cut payments to the Bank of England instead, effectively raising bank costs. Oil and gas companies pay a hefty 38% windfall tax on top of the normal corporate rate. With global prices low, they say this extra tax is killing North Sea investment and jobs. Ministers are under pressure to phase out part of the windfall tax earlier than scheduled.
Wage policies are also under the microscope. The Chancellor is expected to raise the national minimum wage again, above inflation. That helps low-paid workers but pushes up labor costs for employers. Many firms will have to bump up other wages to keep pay scales aligned. Capping tax-free salary sacrifice pension schemes (which let workers put some pay into pensions) would bring more tax in now, but mean smaller pension contributions in the future.
Regulatory changes are coming as well. A new Employment Rights Bill promises that new hires get sick pay and unfair dismissal protection from day one. Businesses warn this could make hiring riskier and more expensive. Ministers say they will implement the reforms carefully, with phased guidance for firms. Either way, companies must prepare for higher legal costs. The government insists it aims to help workers without unduly hurting business, but many firms remain uneasy until the details are clear.
Much of the tough medicine has already been taken, and now the focus is on growth-friendly moves. If the government delivers on promised relief (like easier planning, targeted loans and energy cost cuts) without new shocks, firms may breathe a collective sigh of relief. Many business leaders have delayed major investments until after the Budget, expecting to invest more if no surprises arrive.
Why This Matters
For businesses and investors, Budget 2025 will set the playing field. In the short term, higher taxes and costs may force firms to cut spending or delay expansion. Investors will watch closely: weaker profits could hit stock prices, while any boost to growth could lift markets. In the long run, much depends on whether new infrastructure and planning reforms revive investment. A stable, growing economy would give companies room to invest and could lower borrowing costs for everyone.
For workers and consumers, effects are mixed. Many low-paid workers will see bigger paychecks if the minimum wage rises. If firms pass costs on, shoppers may pay more for goods and services. The cap on salary-sacrifice pension schemes means many employees will save less for retirement. Consumers hope inflation will fall to 2%, which would ease everyday costs like food and energy.
More broadly, Budget 2025 carries political, technological and social stakes. Politically, a clear pro-growth stance could bolster the government’s credibility, while any misstep might fuel criticism that heavy taxes choke vitality. In technology sectors, targeted support is crucial: startups and tech firms will watch for investment in digital infrastructure and loans for innovation. If promised projects come through, the UK could strengthen industries like AI, biotech and green energy. Socially, it will affect whether public services stay funded and how fairly growth is shared.
Impacts
Retail: Many shops and cafes operate on thin margins. A small high-street cafe, for instance, now pays much higher wages after the minimum wage rise, and its business rates bill jumped when pandemic discounts were cut. To cope, the owner might raise prices or reduce staff hours. If electricity bills fall under new relief schemes, that would ease costs. Overall, higher wage and occupancy costs squeeze profits and force tough choices.
Energy: Consider an offshore oil company. With prices low, much of its profit is eaten by the 38% windfall tax (on top of the normal corporate tax rate). These heavy levies squeeze margins. Facing that burden, the firm may delay new drilling projects or trim investment, endangering jobs on its platforms and at refineries. If the Budget eases that windfall tax, some jobs could be saved.
Technology: Imagine a software startup planning to hire more developers. A higher minimum wage pushes up payroll costs across the board. The firm could benefit from targeted support, like low-interest loans or faster planning approvals for new offices. However, stricter employment rules may make it cautious about hiring untested staff. The net effect depends on balance: better infrastructure and credit could help it grow, but higher taxes and costs might slow its expansion.
