U.K. Government Punishes Small Business, Middle Class in First Budget

LONDON — It’s not easy doing business in Britain, and soon it’s going to get a whole lot harder, especially for small businesses.

On Wednesday the Labour government set out its first budget, a brutal one filled with 40 billion pounds in tax hikes targeted mainly at small and medium-sized private businesses, the prosperous middle class, and the very wealthy.

But what else would this left-wing party, which is back in power after 14 years, deliver? Rachel Reeves, the first female Chancellor of the Exchequer in British history, said she’s ready to restore economic stability and deliver national renewal — and she wants to make the wealth creators pay.

Reeves is ramping up capital gains tax, and putting extra pressure on employers by hiking minimum wage and increasing the National Insurance payments they make to the state.

She is also canceling long-standing tax breaks for all private schools, and abolishing the non-dom scheme, which offers tax perks to wealthy foreigners living part time in the U.K.

Reeves plans to replace the non-dom scheme with another, less favorable, one that her office argues will raise 12.7 billion pounds over five years. But will there be any rich left to tax?

Fear of higher Labour levies has already prompted international high net worth individuals, such as tech, retail and finance high-fliers living in the U.K. part time, to flee to tax havens such as Milan, Monaco and Dubai.

Reeves will even target them as they flee. On Wednesday, the Chancellor also unveiled a passenger tax on commercial flights, and private air travel, too.

Luxury jet-setters will, as of April, 2025 have to pay a maximum of 673 pounds per person in tax every time they fly, depending on the destination. As of April, 2026, they’ll have to pay 1,000 pounds per head.

The government’s aim is to fill a 22 billion pound “black hole” in the public finances, balance Britain’s books, raise money for public sector and infrastructure projects including hospitals and schools.

During her speech, Reeves also noted that the government has already attracted 63.5 billion pounds in global investment from firms such as Blackstone, Amazon Web Services, Macquarie, Eli Lily & Co. to support long-term infrastructure, green energy, AI and pharmaceutical projects.

Despite the lofty goals, Reeves’ plan failed to impress, with the British media describing her budget as “dismal,” “bleak” and the biggest “tax bomb” since 1993. The FTSE 100 index closed down 0.73 percent at 8,159.63, while private sector businesses said they were disappointed and worried about the future.

Caroline Rush, chief executive officer of the British Fashion Council, said the organization “welcomes the core messages of the Chancellor’s statement and budget today — economic stability, investment and driving for growth.”

She added that some initiatives might not be so welcome to small and medium-sized businesses in the U.K.’s 28.9 billion pound fashion and fashion retail sector.

Rush argued that while “supporting our workforce is vital, squeezes on employers’ National Insurance” payments and hikes to the minimum wage will increase pressures on businesses already operating at slim margins.

“The BFC will be performing further analysis on the budget and initiatives announced over the next few days, and looks forward to engaging with the government to promote the priorities of the sector, particularly through our response to the industrial strategy,” she added.

Helen Brocklebank, CEO of the luxury industry lobby Walpole, said the impact of some tax changes “may worry businesses already dealing with increased margin pressure and dampened consumer demand.”

Brocklebank added that a greater cause for concern is the U.K. growth projections that Reeves mentioned for the next few years. Reeves cited figures from the Office of Budget Responsibility, a public body that provides independent economic forecasts and analysis of the public finances.

“If, as the OBR predicts, growth will be just 1.6 percent in 2029, finding effective ways to stimulate growth should be the most urgent work of the government,” she said.

“If it is to achieve its aim of making the U.K. economy the fastest growing of the G7, [government] must recognize the contribution of the U.K. luxury sector, 81 billion pounds in GDP and 454,000 jobs. It must also act fast to support this high-growth sector by restoring tax-free shopping, smoothing trade with the EU, and protecting world-renowned British craftsmanship,” Brocklebank added.

Dee Corsi, CEO of New West End Company, which represents consumer businesses in Mayfair, Soho, and around Regent and Oxford Streets, said the government’s decisions will weigh on growth.

“The budget was a significant opportunity to unlock the economic potential of the U.K.’s retail, hospitality and leisure sectors. However, the pro-growth measures businesses were promised before the election remain missing. For our members in the West End, this budget appears to add to the financial pressures they already face,” Corsi said.

Corsi said that while the government’s offer of some business tax relief was a “positive start,” the new tax scheme outlined by Reeves “will risk placing further strain on many businesses in the West End, where operating costs are already inequitable and significantly higher than in other areas.” 

In the U.K., business tax rates are often based on the value of the property where the business is located, meaning that even the smallest businesses, such as corner shops selling newspapers, chocolate and lottery tickets, can often incur enormous tax bills if they’re located in prime areas.

“We urge the Chancellor to collaborate with our sector on swift business rates reform and a national tourism strategy, with the return of tax-free shopping as a central pillar. Such policies, delivered at pace, would not only revitalize the U.K.’s economy, enabling businesses to invest, expand and create jobs, but also strengthen the country’s global competitive edge, driving vital inward investment,” Corsi said.

David Parker of international real estate agency Savills said that, in general, business tax rates “are unpopularly high, and have been for many years. While the introduction of 40 percent tax relief for retail, hospitality and leisure properties…is welcome, it…will disappoint many.”

Small businesses, such as independent fashion brands, marketing and public relations firms, told WWD the new budget measures will impact the way they hire. Going forward, these businesses said they are less likely to take on people full time, or to give staff pay rises if they have to pay more in National Insurance contributions.

It’s clear this government does not like wealth creators, and Reeves drove that point home even before she delivered her maiden speech at the House of Commons.

On Wednesday morning, just hours before Reeves delivered her maiden speech, British newspapers ran a picture of the Chancellor at work in her Downing Street office. Behind her was a large photograph of Ellen Wilkinson, a founding member of the British Communist Party.

Reeves had recently removed a portrait of Nigel Lawson, Nigella Lawson’s father, and Margaret Thatcher’s Chancellor of the Exchequer, to make room for Wilkinson, who was known as “Red Ellen,” both for her political leanings and for the color of her hair.

The Labour Party has not only tried to erase the traces of past Conservative governments, it has also left behind all memories of Tony Blair’s upbeat, capitalist-minded New Labour.

Still, there are some who think Labour is on the right track.

In a letter to The Times of London earlier this month, former New York Mayor Michael Bloomberg, who has a home in London, believes the new Labour government will deliver for Britain in the long run.

“I have never put much stock in threats by the wealthy to abandon a great city over taxes and, as far as companies go, if taxes are the difference between success and failure you do not have a business. Nevertheless, the government must take care to safeguard the City of London’s status as an international center and a magnet for Britain’s entrepreneurs and everyone at all economic levels,” he wrote.

Bloomberg added that the news is “full of reasons to be skeptical and pessimistic, and sometimes government leaders feed on that for political reasons. It is the long view that matters and, with strong leadership that brings people together and asks everyone to share in the burdens and benefits, there is every reason to believe that the U.K.’s best days are still ahead of it.”

The U.K., and London in particular, might have to wait a while longer for those “best days” to arrive.

For all of Labour’s lovemaking to the union bosses over the past few months, the strikes persist. In the first two weeks in November, London Underground drivers will herald the start of the holiday shopping season with a two-week strike.