Business confidence in the UK has climbed to its highest level since Rachel Reeves’ first budget last October, though leaders warn the fragile recovery could be undermined by further tax hikes in the autumn.
The Institute of Directors’ (IoD) index of optimism rose to -61 in August, up from -72 in July, recovering from a record low but still signalling pessimism overall. The IoD said directors were now less worried about investment and headcount, with exports expected to expand despite disruption to global trade from US tariffs.
Hiring and investment intentions have edged higher, offering some relief to Reeves after criticism of her £25 billion national insurance rise on employers, which many argue has weakened the labour market.
A separate survey of 500 mid-sized businesses by consultancy BDO found 74% had already exceeded their growth targets for 2025, driven by stronger consumer demand and productivity gains from AI adoption.
Anna Leach, chief economist at the IoD, cautioned that the rebound in sentiment remained tentative.
“Business leader confidence has picked up slightly from July’s record low, but only to levels seen after the 2024 budget and during the early pandemic,” she said. “Hiring and investment expectations continue to swing back and forth as April’s tax rises ripple through the economy, while cost pressures remain stubbornly high.”
Nearly half of IoD members (47%) said the heavier tax burden had damaged their finances, while 59% complained specifically about the national insurance rise. More than three-quarters (76%) said they remained concerned about the wider economy despite August’s improvement.
The CBI warned separately that business activity is expected to contract in the next quarter, with professional services, retailers and manufacturers all signalling a slowdown.
Alpesh Paleja, deputy chief economist at the CBI, said: “Firms are already shouldering the cost of the government’s fiscal decisions. The autumn budget must not add to that strain with further tax rises that risk undermining investment and growth.”
Economists estimate Reeves must close a fiscal gap of up to £40 billion through either spending cuts or tax increases. Options under review reportedly include reforms to property taxes and adjustments to inheritance tax.
Labour pledged in last year’s election not to raise the main rates of income tax, national insurance contributions or VAT. That has left Reeves relying heavily on business taxation to repair the public finances.
Official figures from the Office for National Statistics showed the economy grew by 0.3% in the three months to June, outperforming forecasts. But business groups warn that higher costs, regulatory pressures and uncertainty over fiscal policy continue to weigh on investment plans.
For now, confidence has bounced off record lows. But with tax hikes still on the table, business leaders fear the fragile recovery could prove short-lived.
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UK business confidence rises to highest level since budget, but Reeves’ tax plans spark concern