Sky-high tax concerns, weakening economic conditions and mounting global volatility have dragged UK business confidence deeper into negative territory in Q2, prompting ICAEW to urge the government to shield businesses from further tax hikes in the Autumn Budget.

ICAEW’s latest Business Confidence Monitor (BCM) for Q2 2025 put confidence at -4.2, its weakest reading since Q4 2022 and down from -3.0 the previous quarter. This fourth consecutive quarterly fall was likely to have been driven by historically high tax worries and slower-than-expected domestic and export sales growth.

ICAEW Chief Executive Alan Vallance says the negative confidence reading is another stark reminder of the perilous situation facing businesses as they continue to grapple with major tax worries at home and an increasingly bleak global picture. A cocktail of costs, including the national insurance (NIC) rise and global instability, has made life especially difficult for businesses across the country, particularly exporters, Vallance warns.

“Businesses are the cornerstone of growth, but without an environment that allows them to thrive, further pain is inevitable. Unless the Chancellor spares business from additional tax hikes in the Autumn Budget, economic prosperity will remain a pipe dream,” he says.

Confidence among exporters was particularly downbeat (-6.1), falling into negative territory for the first time in almost three years amid US tariffs and growing geopolitical instability. Negative confidence scores typically coincide with periods of turbulence for the UK economy, including the significant inflation shock in 2022 following Russia’s invasion of Ukraine.

Tax burden and tariff woes

The tax burden was cited as a growing challenge by more than half of businesses (55%), close to the previous quarter’s record high (56%) and three times the historical average of 18%. This also marks a six-fold increase over the past four years, from just 9% in Q2 2021.

ICAEW said members were concerned about the rise in employers’ NICs from April and nervous over possible further rises in tax and NIC in this autumn’s Budget.

Customer demand was a growing concern for 42% of companies, the highest since Q4 2020 and up from 35% in Q1.

Tougher economic conditions and weakening demand meant expectations for domestic (4.1%) and export sales (3.5%) growth over the next 12 months fell to five-year lows, with export expectations hit by rising global trade turbulence.

Confidence declined in nine of the 11 sectors surveyed. Manufacturing and engineering firms were the most negative, with confidence at -14.0, followed by retail and wholesale (-11.4). In contrast, confidence rose in transport and storage, and property.

UK labour market likely to continue cooling

Suren Thiru, ICAEW Economies Director, says: “Our data signals a desperately difficult second quarter for the UK economy as ‘awful April’s’ surge in costs and deepening global turbulence triggered another striking slump in business sentiment.

“These findings suggest that companies are now reacting to April’s eye-watering surge in costs by scaling back hiring plans and curtailing other employment-related expenses, including pay rewards and staff training.”

Employment growth expectations for the year ahead dropped to 1.3%, the lowest in nearly five years. Job growth is expected to be weakest within property, manufacturing and retail and wholesale, while IT and communications (2.5%) remains above the national average.

This slowdown was likely to have been driven by firms’ response to April’s significant increase in employment costs, including the national insurance rise. Growth in staff training budgets (1.3%) is expected to fall to the lowest level since Q3 2020.

“The marked softening in expectations of future selling price and salary growth should provide some comfort to rate setters that the current inflation spike will soon fade, increasing the chances of an August interest rate cut,” Thiru says. “The notable weakening in the forward-looking indicators of sales activity and employment points to a painful second half of the year for the UK economy as the multitude of domestic and global headwinds take their toll.”

Current inflation spike expected to ease

Salary growth eased to 3.0% year on year, the lowest rate for four years, but remains above the pre-pandemic average of 2.1%. Businesses have revised their expectations for wage growth in the next 12 months to 2.4%, a four-year low.

While selling price inflation (2.3%) rose for the first time since Q2 2023, businesses expect price growth over the next 12 months (2.0%) to be the slowest since Q3 2021. Price growth is expected to be highest among transport and storage firms (2.4%) and lowest in banking, finance and insurance (0.7%).

Vallance adds: “As we move into the season of Budget speculation, it’s imperative that the government learns from the past year. Constant rumours will only serve to destabilise businesses, so we urge the government to be honest about their plans, to give companies the opportunity to plan ahead and weather the storm.”