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Many businesses in the UK saw the 2025 budget as a tightening of the screw in a period of already difficult conditions. While the government insists it is not raising taxes on companies overall, disquiet among businesses could have an impact on jobs, wages and the wider economy.

It’s true that corporation tax (paid by businesses on their profits) will stay at 25%. But other moves are coming. From April 2026, changes to tax allowances that companies can claim on plant and machinery are expected to increase the tax take by more than £1 billion in the first year.

Things such as equipment, vehicles and office fixtures qualify for this allowance, and it means businesses can reduce their tax bill as the value of their assets depreciates. This allowance will fall from 18% to 14% in 2026.

And hospitality and retail firms have complained that changes to business rates (levied on commercial premises) could raise their annual costs by tens of thousands of pounds.

The reduction of income-tax relief for venture capital trusts (VCTs) risks making it costlier for young ambitious businesses to secure money from venture capitalists to help them grow. Tax relief for VCTs will now fall from 30% to 20%, meaning some may choose to back less risky ventures.

And from 2029, national insurance exemptions on salary-sacrificed pension contributions will be capped. This will affect nearly 290,000 employers and act as an ongoing cost increase for firms that use these schemes.

The problem for a government that wants to encourage growth but also needs to raise revenues is that increased taxes on businesses can dampen future investment.

Even if headline corporation tax is unchanged, the mix of allowance cuts, higher employment taxes and sector-specific hits (on pubs, for example) is likely to feed a “tax-raising, not pro-growth” narrative in the business community. And evidence suggests that higher effective corporate tax rates are associated with lower business investment.

For example, dropping the main rate of capital allowance on plant and machinery from 18% to 14% means these investments take longer to pay for themselves. While this is a net revenue-raising move for government, business can perceive this as policy that is tough on productive investment.

The autumn budget relied heavily on fiscal drag (frozen income-tax and national insurance contribution thresholds) and a series of smaller revenue-raisers like the pension salary-sacrifice cap. For the government, there is the risk that this creates a fear that it will keep coming back to “small print” tax measures.

And of course not all businesses will be able to absorb extra costs – many will look to pass these on to their customers. Sectors with thin profit margins (such as pubs, hospitality and small retailers) are warning that business-rate hikes plus higher wage bills force them either to push up prices or cut service and headcount.

While firms with more power will try to raise prices, more squeezed firms may hold prices but trim pay growth or hiring. This aligns with evidence that suggests consumers and workers are most affected by increases in business taxes.

Substituting workers with AI

Other evidence suggests that firms in high-wage sectors and countries adopt more AI, both to replace tasks and to make workers more productive. As the cost of labour rises, businesses are likely to have a stronger incentive to automate. This has already been a trend during periods of cost pressure or downturn – explicitly as a substitute for expensive labour.

As such, it makes financial sense for firms, especially large, capital-rich ones, to respond by increasing spend on AI tools that automate white-collar tasks such as accounting, human resources, marketing and customer support. And they may also choose to offshore or digitise back-office functions where UK labour is now relatively costly.

Without parallel policies to enhance AI skills, retraining and investment allowances for tech that complements labour, the government may be nudging firms towards automation and offshoring. This, of course, can reduce the domestic tax base over time.

queue of people waiting to be served in a shop or cafe
Higher wage bills could leave businesses trying to get by with fewer workers. ilovephoto_KA/Shutterstock

When it comes to the super-rich, reports of an exodus from Britain may be exaggerated. But billionaire steel magnate Lakshmi Mittal did leave the UK just before the budget was announced, reportedly for tax purposes. And the founders of tech firm Improbable and fintech giant Revolut announced plans to do the same thing earlier in the year.

A small number of very wealthy individuals leaving won’t collapse the economy, but a policy mix seen as hostile to entrepreneurship can, at the margins, reduce the UK’s attractiveness as a base for high-growth founders and investors.

Think tanks, including the Adam Smith Institute, highlight that the people who leave tend to be “liquid millionaires” – founders who have sold businesses and are mobile. If too many of that very specific group leave the country, the UK could lose the mentoring networks, angel capital and soft power shoring up its “entrepreneurial ecosystem”.

This could lead to a slow erosion of the UK’s reputation as a place where ambitious and entrepreneurial people want to build things.

To restore trust that the government is not just pro-welfare but also pro-business, it should publish a multi-year tax roadmap for businesses, limiting surprise “salami-slice” changes. It could also offer incentives for firms using AI that complements workers – for example, through tax relief for AI systems that augment workers and job quality.

And to have a broad-based approach to wealth creation, it should support youth and student entrepreneurship and innovation. This could shift the narrative back to business creation, growth and prosperity.

This article is republished from The Conversation, a nonprofit, independent news organization bringing you facts and trustworthy analysis to help you make sense of our complex world. It was written by: Jagannadha Pawan Tamvada, Kingston University

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Jagannadha Pawan Tamvada does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.