UK Economy: Growth Falters, Inflation Rises

Practical Takeaways for Business Owners

Business owners across the UK are facing an increasingly complex economic picture. Inflation has crept up again and recent figures show the economy has contracted for two months in a row. So, what’s really going on – and what should you be doing as a business owner?

Inflation rises again

The latest figures from the Office for National Statistics show inflation rose to 3.6% in the year to June, up from 3.4% in May. This is the sharpest increase since January 2024 and was driven mainly by rising motor fuel and food prices. Food price inflation has increased for the third consecutive month.

The Bank of England expects inflation to peak around 3.7% in the summer before easing towards its 2% target later in the year. But for now, rising prices are continuing to put pressure on households and businesses alike.

Economic growth faltering

The economy shrank by 0.1% in May, following a 0.1% fall in April. These figures were worse than expected and are mainly down to a drop in manufacturing and weak retail sales. While the economy saw strong growth earlier in the year, that now looks like a temporary boost – partly due to changes in US tariffs and the end of the UK stamp duty break.

Although the economy isn’t technically in recession, it is clearly struggling. Business confidence and activity in some sectors remain fragile, and growth may be modest in the months ahead.

Interest rate cuts on the horizon

There may be some relief ahead in the form of lower interest rates. Bank of England governor Andrew Bailey has said he believes the path for rates is “downward”, and many economists expect a rate cut at the next review in August.

Rates currently sit at 4.25%. A rate cut would reduce the cost of borrowing and could help ease pressure on mortgages, loans and credit. The Bank is being cautious because inflation is above target. However, Mr Bailey indicated that if the job market is showing signs of cooling down, the Bank will be prepared to make cuts.

There are signs of that happening. The number of job vacancies has fallen to its lowest level since 2021, and more people are now available for work.

Many employers are struggling to absorb increased payroll costs due to the government’s recent increase in National Insurance for employers as well as the National Living Wage. As an example, National Trust cited these as reasons for its plan to cut 550 jobs from its payroll over the next few weeks.

What are the takeaways for your business?

Here are some key takeaways and practical tips for navigating the current climate:

1. Keep an eye on costs: With inflation on the rise again, review your costs – especially around fuel, food and other goods affected by price increases. If you can, negotiate supplier contracts early to lock in rates.
2. Plan for potential interest rate cuts: If your business has borrowing (loans, overdrafts or credit lines), a rate cut in August could reduce your costs. Consider reviewing repayment terms or refinancing if you expect rates to drop further later in the year.
3. Watch your cashflow: If the economy is stalling, demand in some sectors may weaken. Make sure you have a clear view of your cashflow over the next 3-6 months. Adjust your spending plans if needed and chase payments due from your customers promptly.
4. Take care with hiring decisions: Given slower economic growth and higher employer NICs, it’s sensible to be cautious with recruitment. Consider flexible or temporary options if you’re unsure about long-term demand.
5. Exporting? Look abroad for growth: Some UK businesses are still thriving by focusing on overseas markets. If your product or service can be exported, this may be a way to grow, even if domestic demand softens.
6. Be ready for tax changes at the Autumn Budget: The Chancellor will face difficult choices later this year, and some are anticipating further tax changes. We’ll be keeping you updated as we learn more.

Final thoughts

It’s a challenging environment, but not without opportunities. If you stay alert, control what you can, and keep your plans flexible you’re likely to be well placed to keep your business resilient as the economic picture develops.

If you need help reviewing your costs, cashflow or hiring strategy in light of these changes, we’re here to help.

HMRC Releases Transformation Roadmap

Increased Automation Coming to Tax Services

July seems to have been a month of ‘roadmaps.’ In addition to the roadmap for the Employment Rights Bill covered above, HM Revenue & Customs (HMRC) announced its Transformation Roadmap – a plan to modernise the UK’s tax and customs systems by 2030.

HMRC have said that the aim of the Transformation Roadmap is to make the tax administration system more automated, more focused on self-service and better set up to get things right first time. The roadmap includes more than 50 IT projects, services and measures.

Let’s see what some of these include.

New PAYE service

As part of the Transformation Roadmap, a new online PAYE service will be launched that’s designed to give all UK PAYE taxpayers easier access to their tax affairs. Through their Personal Tax Account or the HMRC app, employees will be able to check and update things like:

• Income details
• Tax codes
• Allowances and reliefs
• Work-related expenses

For employees, this should mean more visibility and control of their tax. For employers, it could mean fewer questions from staff about their tax codes or deductions – especially if you’re already fielding those awkward “why has my tax changed?” queries.

If you run payroll or support employees with benefits or expenses, it’s a good idea to keep an eye on these updates. Over time, staff might expect you to understand and even guide them through using these services.

Push for 90% Digital by 2030

HMRC is clear that they feel the future is digital. Their goal is for 90% of customer interactions to happen digitally by 2030.

That means less reliance on letters and phone calls, and more emphasis on apps, online forms, and AI-powered assistants. In fact, HMRC believes they can save £50 million a year just by reducing paper correspondence.

Post will still exist, but only for critical correspondence and those who genuinely need it.

AI and Automation

Artificial Intelligence (AI) is playing a big role in this transformation. HMRC will use it to:

• Help staff summarise calls and cases
• Improve online guidance with digital assistants
• Spot fraudulent documents using biometric checks
• Develop principles for how third-party software (like payroll or tax apps) should interact with HMRC systems

It seems there is a growing emphasis on real-time data and compliance. For example, the introduction of a Digital Disclosure Service will allow taxpayers to correct mistakes more easily – but also means HMRC will have better tools to spot issues.

What Else is Coming Soon: A Few Key Projects

A few measures that HMRC are planning to rollout in this tax year include:

• SMS confirmations for Self Assessment updates and some PAYE services
• A more streamlined process for registering or exiting Self Assessment
• Voice biometrics to speed up telephone verification
• A new option for higher earners to manage Child Benefit charges through their tax code

There’s also a focus on tackling offshore tax avoidance, especially among high-net-worth individuals and umbrella companies.

What’s Coming Later?

HMRC will be looking at how they can modernise the penalties they charge for late tax payments and will be providing an update on how they plan to do this later in the year.

Other measures that are in the pipeline include:

• Digitising the Inheritance Tax service.
• Allowing agents to submit information that affects a tax code digitally.
• An electronic trade documentation pilot looking at how to improve customs operations.

New legislation is also planned for April 2026 that will make recruitment agencies legally responsible for accounting for PAYE where they use umbrella companies – so if you use workers in such an arrangement that’s going to be worth a closer look.

What Should You Do Now?

Here are a few simple steps to consider:

• Encourage employees to activate and explore their Personal Tax Accounts if they have questions about their tax code.
• If you use payroll software, keep an eye on updates from your software provider to make sure your system remains compatible with future HMRC requirements
• Stay informed – we’ll be keeping an eye on the rollout and will continue to share relevant updates.
• Plan ahead for compliance – it looks as though HMRC will be quicker to penalise when things aren’t done right.

If you’re unsure how these changes might affect your business – or you’d like help reviewing your payroll, compliance processes, or digital readiness – we’re here to support and help you.

To read the Transformation Roadmap in full, see here.