Economic recovery anticipated in the UK
The UK economy is bracing for potential difficulties as incoming tax hikes, particularly those projected in the Autumn 2025 Budget under Chancellor Rachel Reeves, could have a negative impact on economic growth and the job market given the current economic climate.
The Office for National Statistics (ONS) is expected to release the UK growth figures for June on Thursday, but economists are already predicting a slowdown. According to polled economists by Bloomberg, the UK economy is expected to have grown by 0.2% in June, a figure that could be made smaller. The ONS is expected to show a softer decline in job numbers than seen in previous months, but the Recruitment and Employment Confederation's research indicates further cuts in payroll budgets at UK companies.
The slowdown in economic growth is a pressing concern, with the UK economy already experiencing subdued growth. GDP expanded by only 0.3% in Q2 2025, and projections indicate growth will remain low, around 0.3% quarterly and 1.1% annually in 2026. Tax increases are expected to weigh further on growth prospects.
The impact of tax hikes extends to businesses and investment. Previous large tax hikes, such as the £20bn increase on national insurance contributions (NICs) in 2024, raised the employer NIC rate and lowered thresholds, damaging the jobs market, limiting investment by firms, and contributing to sticky inflation as businesses passed higher costs onto consumers. Further increases are likely to exacerbate these effects, potentially suppressing job creation and business investment.
The potential job market constraints are another significant concern. Employer NIC increases lower incentives for hiring and investment, which can dampen employment growth. Business groups have expressed concern about further tax burdens harming jobs and business viability, especially after the prior employer NIC hike.
Investment could also be deterred by tax hikes on dividends, capital gains, and potential wealth taxes. This could reduce capital available for business expansion and innovation.
The government's fiscal position is driving the tax hikes, as it faces a significant fiscal shortfall (£57.1 billion projected by 2029-30) and limited room for spending cuts, making large tax rises appear unavoidable to meet fiscal rules. This fiscal tightening will likely constrain demand in an already slow-growing economy.
The UK economy faces potential issues not only from the upcoming tax hikes but also from other factors. The rise in GDP of 0.7% in the first three months of the year was largely due to buyers purchasing goods before tariffs and taxes hit the UK economy. Tensions have calmed between major economies and President Trump, resulting in a decrease in effective tariff rates.
However, a risk lies in the upcoming Autumn Budget, not only in terms of possible policies announced but also the uncertainty in the lead-up to it. Vacancies are dropping at a faster pace, according to the Recruitment and Employment Confederation, adding to the economic uncertainties. Consumers are pessimistic about the economic outlook but relatively certain of their personal financial situations, according to HSBC economist Emma Wilks.
In summary, the expected incoming UK tax rises will probably dampen economic growth further, constrain the job market, and limit business investment, amid an already weak economic environment and subdued consumer spending growth. These factors collectively suggest a cautious and challenging near-term outlook for the UK economy and labour market as tax burdens increase to address fiscal deficits.
The looming tax hikes, especially those projected in the Autumn 2025 Budget, could negatively affect both the economic growth and job market, given the current economic climate, as they might further strain the already slow-growing UK economy. Additionally, the implications of these tax increases extend to various sectors, such as business and finance, as they may deter investment and limit capital available for business expansion and innovation.
