UK Business Morale Plummets Amid Tax Burden and Trade Uncertainties

The UK’s economic landscape has taken a grim turn in early 2025, with business confidence plummeting to its lowest level in over two years. According to ICAEW’s Business Confidence Monitor (BCM), the Q1 2025 index dropped to -3, marking a stark contrast to the neutral reading of 0.2 in late 2024. This decline signals a deepening crisis fueled by tax hikes, trade tensions, and stagnant domestic demand—a perfect storm that investors must navigate carefully.

Tax Burden: The Heaviest Weight on Businesses

The data paints a dire picture for UK firms, with 56% of businesses citing the tax burden as a major concern—a record high and seven times higher than in early 2021. The April 2025 national insurance contributions increase has exacerbated this strain, particularly for sectors like manufacturing and engineering, where confidence has nosedived to -11.1, the lowest since records began.

The tax burden isn’t just a temporary headache. With input costs rising to 3.9% in Q1—the first increase in two years—businesses are squeezed on both ends. Yet, selling prices have stagnated, growing at just 2.7%, the slowest since late 2021. This margin squeeze leaves firms with little room to maneuver, forcing cost-cutting measures that threaten long-term productivity.

While the FTSE 100 has shown resilience, the index’s gains mask sectoral divides. Manufacturing and energy stocks, which are disproportionately affected by taxes and tariffs, have underperformed.

US Tariffs: A “Blizzard of Extra Outlays”

The temporary reduction of US tariffs offered little relief. ICAEW warns that the uncertainty around trade policies has created a “blizzard of extra outlays”, with UK firms bracing for higher global costs. The National Institute of Economic and Social Research (NIESR) estimates that sustained tariffs could drag UK GDP growth to near zero by 2026, a stark warning for investors in export-reliant sectors.

The automotive and manufacturing industries, already reeling from tax hikes, face additional pressure. For example, tariffs on UK steel imports into the US could force companies like Jaguar Land Rover to revise supply chains, potentially impacting their competitiveness.

Sectoral Disparities: Winners and Losers in the Economic Slump

Not all sectors are equally vulnerable. While manufacturing and retail confidence has cratered, sectors like IT and construction remain stubbornly positive—though even these are slowing. IT and communications saw employment shrink by -0.6% in Q1, the worst since 2010, as firms cut back on hiring amid weak sales expectations.

The property sector, a traditional bellwether, also faltered, with confidence sinking to -10.3. This reflects broader consumer caution: domestic sales growth expectations hit a two-year low, rising just 3.4% in Q1.

Policy Calls and the Path Forward

ICAEW’s executives have issued urgent calls for action. Chief Executive Alan Vallance warns of businesses in a state of “despondency”, while Economics Director Suren Thiru describes the outlook as “increasingly sour”. Their recommendations?

1. Resolve trade disputes with the US to reduce tariff uncertainty.
2. Targeted tax relief for hard-hit sectors like manufacturing.
3. Invest in productivity through staff training—a budget line that’s already at its lowest since 2021.

Conclusion: A Rocky Road Ahead

The Q1 data underscores a critical inflection point for UK businesses. With confidence at -3, tax worries at record levels, and the specter of near-zero GDP growth looming, investors must prioritize defensive strategies.

Focus on sectors insulated from trade wars and tax hikes: utilities and energy (which maintained a 6.9 confidence score) or IT firms with strong domestic demand. Avoid overexposure to manufacturing or retail unless companies have demonstrated supply chain agility.

The numbers are clear: if the UK government doesn’t act swiftly to address taxes and trade, businesses will remain in a holding pattern. As ICAEW’s Alan Vallance starkly notes, prosperity is a “pipe dream” until these barriers are dismantled. Investors would be wise to heed the warning signs—and position portfolios for prolonged uncertainty.

The NIESR’s grim projection of near-zero growth by 2026 serves as a stark reminder: this is no fleeting dip. The UK economy is at a crossroads—and the path forward depends on policymakers’ willingness to act.