Last year, the UK hospitality sector turned over £140B, which equated to approximately £54B in taxes, funding vital public services. The sector remains one of the UK’s largest employers, employing approximately 1 in 10 people, and is bigger in the UK than the automotive, aeronautics and pharmaceuticals sectors combined. Evidence also suggests that the UK hospitality sector can potentially grow substantially quicker than other areas of the UK economy, making the hospitality sector vital in the UK for future investment, growth, and overall economic health.

Back in June 2024, UK Hospitality held its Annual Summer Conference, providing valuable insight from various industry experts. The tone was relatively positive and optimistic.

• At the conference, Ian King (Business Presenter at Sky News) cited various reasons to be cheerful. The early part of 2024 had seen interest rate cuts and global growth that was more robust than previously expected, representing a huge turnaround from where things previously stood. The UK experienced growth of 0.6% in the first 3 months of 2024, which was the strongest growth in the period since Russia invaded Ukraine. Employment also remained remarkably low. Looking ahead, interest rates would likely fall, and more growth was expected in 2024. There were also causes for celebration – such as the fantastic UK start-up scene, the amount of capital being invested in the UK (which is substantially ahead of the rest of Europe), and the fact that the UK remains a place where much international talent wants to live and work.

• Further, the economic predictions from Yael Selfin (the Vice Chair and Chief Economist at KPMG) were that, despite a few economic headwinds, growth would likely pick up for the hospitality sector in 2025. Keys to such growth were sector improvements in productivity (including the quality of management, investments in training and skills, investments in tech, etc). Whilst the tax burden would remain relatively high, the hospitality sector would likely pick up more strongly than other areas of the economy. Drivers – such as relatively low unemployment and decreases in inflation and interest rates – were also likely to increase consumer spending, against a backdrop of relatively sluggish economic growth. UK domestic travel would remain relatively strong. International tourism and spending in the UK were also likely to continue on an upward trajectory.

In October 2024, following Labour’s autumn budget, UK Hospitality held a webinar outlining the likely implications for the sector. The main implications for the hospitality sector included:

Changes to hospitality rates relief:

• Businesses under the £110k limit, will see hospitality relief fall from 75% to 40% for the next year (therefore halving the business rates relief from 1 April 2025, but in a context where the last government was looking to take away such relief entirely).

• Further, the government has committed to a new permanent hospitality and retail discount for premises from 2026/27, applying to properties with a rateable value under £500k.

Changes to employer National Insurance contributions:

• The main rate of Employer NICS will increase from 13.8% to 15% (an increase of 1.2%), and the threshold at which an employer pays NICs will also fall from £9,100 to £5,000 – meaning more National Insurance will be paid for each employee.

• The Employment Allowance will increase from £5,000 to £10,000 for the 2025/26 tax year, and the £100,000 threshold for eligibility will be removed (benefitting some small businesses).

Changes to minimum wages:

• The National Living Wage will increase to £12.21 per hour for all eligible employees (a 6.7% increase).

• The National Minimum Wage for 18-20 year olds will increase to £10 per hour for all eligible workers (a 16.3% increase).

• The minimum wages for under 18s and apprentices will increase to £7.55 per hour (an 18% increase).

• The Accommodation Offset rate will increase to £10.66 a day (a 6.7% increase).

In short, the implications of the autumn budget mean challenges ahead for the hospitality sector (and the service economy as a whole), as the above changes alone are estimated to cost the hospitality sector approximately £3.4B. Further, it is estimated that the changes are likely to slow the fall of interest rates by 0.25%, and slow financial growth, all of which impact consumer spending habits. Such changes (especially around NICs) will have a disproportionately high impact on the hospitality sector, affecting a large volume of young (and historically exempt) members of the sector workforce and bringing them into tax for the first time.

In November 2024 UK Hospitality held a further webinar outlining the big picture for the hospitality sector. The key messages included:

• The budget changes from 1 April 2025 are likely to be intensely felt by the sector.

• There will be an intense squeeze to get through the next 12 to 18 months, where there is likely to be an impact on jobs, wages, growth and investment. The sector will also need to observe the extent to which “doom-and-gloom” narratives impact consumer confidence.

• There remains, however, a better outlook regarding changes to business rates going into 2026 – with a commitment to reform business rates and introduce a permanent lower multiplier for hospitality businesses, and with other changes promised on rent reviews, changes on commercial leasing code, and changes on the apprenticeship levy.

• There are also positives regarding current consumer confidence, and much is likely to improve further if the government begins to talk up the positive tilts for consumers – for example, no change to tax rates for consumers, no NIC tax increases for consumers, boosts to household disposable income, wage rate increases, and the fact inflation and interest rates are still likely to fall, etc.

Interest rates are currently 4.75%. Inflation is likely to be at around 2.5% to 3%, rather than the relatively benign 1.7% to 2%, before coming down again. As such, interest rates will eventually fall, but not as fast or as far (mainly attributable to the changes to NICs). However, to put things in perspective, Q3 2024 figures show that the hospitality sector is currently experiencing 1% growth on 2023, and 9% growth on pandemic levels. The big winners at present are in the holiday and entertainment sectors (i.e. the businesses on the more “experiential side” of the sector), where consumer spending remains relatively high.

There is presently a polarization of consumer reactions to the landscape ahead; with broadly 1/3 of consumers anticipating they will be going out more and spending more, 1/3 staying the same, and 1/3 anticipating going out less and spending less. Importantly, businesses working on the “experiential side” of the sector (i.e. where consumers focus more on making memories, rather than just buying physical things) are typically seeing better rates of recovery. However, experiential consumers are now also looking for more added experience (i.e. something new and exciting), rather than simply lower cost. Going forward, if the sector can properly fulfil this experiential side of consumer demand (using technology and training its workforce with these dynamics in mind), it will likely get people going out and spending more, which will inevitably impact recovery positively for the sector as a whole.

Looking towards the future for the hospitality sector, there are clearly key areas for focus and improvements. These include: kickstarting economic growth for the benefit of everyone; shaping the policy environment with the hospitality sector in mind; making sure the government’s industrial strategy includes hospitality; fiscal reform (including further work regarding business rates and the apprenticeship levy); improving efficiency and productivity in the sector; addressing the tightness in the labour market; strengthening the sector’s available skills base and addressing employment rights issues; making planning reform more streamlined; managing energy costs and making Britain a clean-energy superpower; improving trading relations outside the UK; keeping independents and small businesses in mind, not just large corporates; taking back our streets; promoting regeneration to make spaces where people want to live and work; breaking down barriers to opportunity; championing the hospitality sector; creating the conditions for investment and growth; and at the same time, creating long-term stability, by factoring in risks and planning for shocks. In terms of sector behaviors, tapping into the “experience economy”, and providing consumers with “added experience” and something new and exciting, remains a key factor for driving consumer spending.