2025 MHA Manufacturing Report

Welcome to MHA’s 2025 UK manufacturing report

The international economic turbulence over the last few years, from Brexit to the Covid 19 pandemic and more recently the ongoing uncertainty of tariffs, has no doubt left deep and permanent scars on the sector. 

Recent domestic events, including the increases in taxation and the ongoing skills shortages, as well as the inflationary and supply chain pressures caused by the war in Ukraine, have not helped either. 

Manufacturing at the crossroads

An economic update from Professor Joe Nellis, Chief Economic Advisor to MHA

UK plc's have suffered from a series of economic woes since 2019 with the departure of the UK from the EU, the impact of the Covid 19 pandemic and its prolonged aftermath, economic volatility leading to stubbornly high interest rates and inflation and most recently macro uncertainty around the tariff regime with the United States. 

Despite this negative backdrop, the UK manufacturing industry is positive about the future with virtually all of our survey respondents anticipating some growth in the next 12 months. While fifty-five percent anticipate modest growth of between 3-5%, a significant minority - 55% - believe that their businesses will grow by more than 6% in the next year. Given the challenging last decade or more, this is a positive sign that, having fallen so far, the only way is indeed up and the sector is by now well-adjusted to the new economic reality.

While there is some positivity around growth from manufacturers, significant challenges remain across a varied spectrum of issues.

It is unsurprising that for larger businesses that the impact of tax, while important, is eclipsed by technology and cyber security. However, it is interesting that skills shortages, frequently touted as an ongoing concern for the manufacturing industry, have not featured higher on the list of challenges. 

Welcome investment in R&D

Despite the Autumn Budget, 55% of all survey respondents said that they would be investing between 3-5% more in R&D in the next 12 months compared to the previous 12 months and even encouragingly 27% said that they would be investing more than 6% above their previous budget. These are positive signs for the long term future of the industry. 

Restrictions are coming in within the UK R&D tax credit regimes through the introduction of the merged scheme, which came in for the accounting period beginning 1 April 2024. Under these restrictions, a large majority of companies claiming R&D credits in the UK will no longer be able to claim on overseas costs.

However, there is a potential exemption that might apply to some manufacturing companies. If there is a reasonable basis to say that the conditions that exist in an overseas jurisdiction cannot be replicated within the UK in a specified time frame and at a specified level of skill, then it could be possible to include some of these as overseas costs. Manufacturing businesses still have a window of opportunity to reinvestigate their R&D position. 

However, there were some regional variations as to the most pressing issue: 

Closing the skills gap

As the survey shows, the shortage of skills has been a perennial concern for manufacturers for years. For manufacturers while the Apprenticeship Levy was a good idea in theory when it was introduced in 2017, it is widely accepted that it has not had the desired impact. The problem has been exacerbated by the post-Brexit restrictions on the freedom of movement of workers. 

Again, our respondents are unwilling to wait for Central Government action. They are acting now to close the skills gap by creating an apprenticeship programme, training partnership with college or university or alternatively, investing in AI with a view to closing the skills gap in a different way all listed as equally valuable. 

For companies of different sizes there were divergent options. Forty-five percent of businesses with a turnover of under £100m are planning to use a training partnership with a college or university whereas 48% of businesses with a turnover of over £250m are planning to invest in AI with a view to closing the skills gap in an alternative manner. 

There are, of course, considerations around how companies should use these allowances and specific rules attached to each, but overall the capital allowance regime is considered to be advantageous (and underused) in assisting businesses to claim relief for investment.

Energy costs 

While the government is keen to grow the sector, the energy demands required to fulfil this growth is significant. The development of new technologies, such as data centres, as well as more traditional areas, such as steel production, require huge amounts of energy. However, currently, the UK’s energy costs are the highest among major economies and this is a key concern for all manufacturers as highlighted in our survey. 

While the survey highlighted that there are considerable challenges for the manufacturing sector, it also showed that there are bright spots ahead in the next 12 months. The announcement of the long-awaited Industrial Strategy could and should be the impetus that the sector needs to set it on the path to more sustainable growth in the UK, with public and private investment and the ability to withstand any further economic volatility.

Regardless of its impact there is clear evidence from our research that despite the obvious challenges it faces UK manufacturing is above all resilient and looking to the future. Investments in technology, R&D and bridging the skills gap are all welcome signs of a sector that is charting its own course for success.

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