Budget 2025: What can nervous businesses expect from the Budget?

Business leaders face a nervous final few days before the chancellor’s second budget, having borne the brunt of a brutal series of tax rises this time last year.

Businesses are still reeling from it: a £25bn rise in National Insurance and an inflation-busting rise in the minimum wage.

Trust in boardrooms has become increasingly fragile as the budget approaches. Almost every measure of sentiment among CEOs and finance heads over the past six months has shown alarm bells ringing.

So what can nervous business owners and leaders expect from Rachel Reeves?

We are sure that taxes will increase and that will take money out of the economy. Research firm Capital Economics estimates that the Budget will reduce GDP by 0.2% in 2026, a significant blow to an economy that only grew 0.1% in the third quarter of this year.

However, as the chancellor withdraws money from the economy, the Bank of England is likely to return the money by lowering interest rates, encouraging people and businesses to borrow and spend.

And, as a senior government adviser told the BBC, that means many of the “big things” that affect business confidence, including inflation, are expected to fall next year. I would expect the chancellor to accentuate those positive aspects.

When it comes to business, the Government will partly want to be judged by what it doesn’t do in this Budget: no more nasty surprises, no more across-the-board tax rises.

The head of the CBI business group, Rain Newton-Smith, has said “stability is the only path to growth” and urged the government not to hit businesses with more taxes.

Speaking at the CBI’s annual conference, he said the government needed to make “difficult decisions for growth now, before they become more difficult, having the courage to take two difficult decisions instead of 20 easier ones.”

“It means one or two broad tax increases, rather than dying for a thousand taxes.”

So what could be in the mix?

Business rates are a problem. Many businesses have seen their bills almost double, after a 75% pandemic-era discount for retail, hospitality and leisure businesses was reduced to 40% last year.

The chancellor had already promised reforms. It could make existing discounts permanent and eliminate the cliffs that cause small businesses’ rate bills to skyrocket when they expand. This could be paid for in part by increasing rates on larger retail properties.

Business Secretary Peter Kyle will address the Confederation of British Industry (CBI) conference on Monday and has a couple of business-friendly policies to announce.

This includes a consultation on how to reduce energy bills for 7,000 businesses and an order for the British Business Bank to focus its lending on the eight “high potential” sectors identified in the industrial strategy.

The chancellor is also likely to point to the upcoming Planning and Infrastructure Bill – legislation she has described as “probably the most important thing we will do in this parliament” – as a way to remove barriers to growth.

Bank profits are a tempting target and there have been mixed messages about whether he could raise taxes there. But ministers are concerned it does not fit the pro-growth, pro-investment narrative.

The Treasury is likely to reduce payments to the Bank of England covering its losses on sales of government bonds that were bought to support the economy during the pandemic and financial crisis.

This, in turn, reduces payments to commercial banks and would be seen by them as a banking tax in all but name.

The oil and gas industry has lobbied hard for a reprieve from “windfall” taxes on its profits, arguing that with low oil prices, there are no windfall profits to tax. They say investment in the North Sea is reducing rapidly, with knock-on effects in the closure of refineries and chemical plants. Businesses say the aid could preserve jobs.

The additional 38% tax, which is on top of an industry-specific 40% tax rate, is set to expire in 2030. There is a chance it could be phased out sooner.

There is still concern among employers over the government’s flagship Employment Rights Bill, which promises sick pay and protection against unfair dismissal for new workers from day one.

Rain Newton-Smith told the CBI conference that the government should “change course” on the bill and that businesses were not being listened to.

There are no signs the government is backing down, but Kyle recently told a committee of MPs that 26 consultations will be held on exactly how these measures will be implemented.

The chancellor is also expected to talk about consumers having the “confidence to spend”.

Some in the business community will interpret this as a possible harbinger of another above-inflation increase in the national living wage, which also tends to push up other wages in a company’s pay structure.

Another policy that will affect both employers and employees is a limit on salary sacrifice plans that allow workers to put part of their pre-tax earnings into their pension funds.

These plans are widely used in larger companies and there are concerns that cutting them will mean less generous workplace pensions in coming years.

What the government wants businesses to hear is that it is on their side, that it knows that a lot was asked of them last time and that this time they will be forgiven, even marginally helped where possible.

After months of anxious waiting, companies will be able to breathe a collective sigh of relief.

According to a recent Barclays survey, 55% of business leaders say they are delaying investment decisions until they have seen the Budget. But 43% say they expect to increase investment afterwards, a sign of possible pent-up optimism.

But trust remains very fragile. The chancellor will have to tread carefully.