A crucial moment for UK manufacturing: will the Budget deliver?
Chris Barlow · Posted on: October 1st 2025 · read
This article was featured in The Manufacturer and written by Chris Barlow, head of manufacturing and engineering at MHA.
As the Budget approaches, the manufacturing sector stands at a critical juncture. For years, this cornerstone of the British economy has been battered by a series of headwinds, from post-Brexit trade complexities, a lack of engagement and leadership from successive governments to persistent tax increases. November 26th is an important inflection point that could impact manufacturers for many years to come.
Rising tax burden hitting recruitment and investment
Our latest report this summer emphasised how UK manufacturers are still feeling the significant impact of recent tax hikes from the 25% rate of corporation tax introduced in April 2023 by the last Conservative government, to the new Labour government's decision to increase employers' National Insurance contributions last October.
Coupled with a rise in the minimum wage, these have been damaging blows to an industry already facing tightening margins. Our research highlighted that these increased costs have led directly to a reduction in headcount and a freeze on future recruitment by manufacturers.
When asked about the impact on future investment plans over two thirds of the 1,000 respondents said the burden of these additional taxes would negatively affect their spend on technology, AI, and R&D, at a time when UK manufacturers should be investing in these areas to remain globally competitive.
2025 MHA Manufacturing Report
Read more about 2025 MHA Manufacturing ReportRead moreNew technology is not just about growth, but also for companies to protect themselves from threats like cyber-attacks which 33% of firms considered their main challenge.
These attacks cause massive disruption, leading to a drop in production and a loss of revenue for both the manufacturer and every business in their supply chain.
What next for the Industrial Strategy?
The launch of a long-awaited Industrial Strategy in June was welcome news to the industry although it coincided with depressing analysis from Make UK that showed that the UK had fallen out of the top 10 manufacturing nations in the world for the first time since the Industrial Revolution. For many in the sector this is a direct consequence of a lack of a well-defined long-term plan to support UK manufacturers in comparison to other major economies like China and the US.
Manufacturers now want the UK government to put real money and set concrete timelines behind the Industrial Strategy to begin reversing this trend hopefully from this Autumn.
They want to see a visible commitment to a public, multi-year funding programme broken down by department and priority sector, with specific deliverables.
Pain points
When asked what the Industrial Strategy should be focused on two issues from our research consistently emerged:
While the Apprenticeship Levy was a good idea in theory, it has not had the desired impact and has been exacerbated by post-Brexit restrictions on the free movement of workers. Businesses are taking matters into their own hands, with many creating their own apprenticeship programmes or partnering with local education colleges. Larger companies are also increasingly looking to invest in AI as an alternative way to close the skills gap.
Energy costs are another significant drag on the sector's competitiveness, with the UK’s energy prices among the highest of major economies. Reports that the Chancellor is considering a £1 billion annual subsidy to lower energy costs are a step in the right direction, but the industry wants more. Extending and widening the Supercharger scheme to more sectors and setting a clear target for closing the price gap with our European competitors would certainly help.
Reports that the Chancellor is considering a £1 billion annual subsidy to lower energy costs are a step in the right direction, but the industry wants more
Navigating global trade
International challenges remain for the sector. Post-Brexit barriers continue to disrupt UK trade with the EU and act as a drag on growth particularly for those industries who have been deeply integrated into EU supply chains over many years. The need for businesses to navigate both UK and EU regulatory landscapes has led to significant costs, with some UK companies forced to open offices on the Continent to remain compliant.
While Brexit is a known entity, a new and significant challenge has emerged this year in the form a US 10% baseline tariff on most UK goods and higher, more punitive tariffs on critical sectors like steel, aluminium, and cars.
For many UK businesses, particularly SMEs, these tariffs are not just a distant political event but a direct hit to their bottom line, forcing them to rethink their entire export strategy and cut back on their product ranges.
Encouraging innovation and investment through the tax system
So, what would manufacturers like to see in November? As a start for the Chancellor to look again at reversing her predecessors’ decision and lower corporation tax. This would make the UK a more competitive place to do business without impacting the Treasury’s coffers.
And while investment in innovation and new technologies is vital for the manufacturing sector, the tax landscape is complex and, at times, a deterrent.
Although the introduction of the merged R&D tax credit scheme in April 2024 increased the incentive upside for large companies to invest, rising costs elsewhere have led to a net reduction in take up. The government must look again at using the tax system to incentivise innovation and encouraging the type of forward-thinking that drives the long-term economic expansion and growth this economy (and the Chancellor) so desperately needs.
Compounding this is the underuse of capital allowances and incentives like full expensing, which allow businesses to deduct the full cost of qualifying plant and machinery from their annual taxable profits in the year of purchase. This needs to be addressed.
And while investment in innovation and new technologies is vital for the manufacturing sector, the tax landscape is complex and, at times, a deterrent.
A long-term plan
Manufacturers also need targeted relief to help them manage soaring energy costs, which are becoming a significant barrier to growth and competitiveness. And longer term a resolution of the trading issues with the US and EU is also important to bring a greater stability.
The Upcoming Budget
"The upcoming Budget is a moment of real opportunity for the government to show its support for British manufacturing. The sector is ready to innovate and grow, but it needs a clear, tangible plan that addresses the challenges of taxation, investment, skills, energy, and trade. We will all listen with interest to the Chancellor on November 26th."
