As Chancellor Reeves prepares to unveil her Spring Statement, the coming week will serve as a crucial litmus test, revealing the tangible effects of her recent fiscal policies on the UK economy and specific sectors. 

The country’s hospitality sector, already reeling from a challenging economic climate, faces mounting pressure leading up to the Spring Budget of 2025. A confluence of fiscal changes, designed to shore up public finances, threatens to add on to existing financial vulnerabilities. Business owners, employers and workers are all questioning the sector’s insolvency rate, which was at an all time high in 2024.

Amongst the key changes driving these fears is the increase in Employer National Insurance Contributions (NICs). This will rise from 13.8% to 15% on April 1st. This increase on salaries above £5,000, is projected to add an estimated £1 billion in costs to the sector, compounding existing pressures like the minimum wage increase. This tax hike, intended to bolster public finances, is expected to force hospitality businesses to raise prices, potentially reduce staffing, and explore cost-cutting measures.

This added financial burden comes at a time when the sector is already grappling with rising energy costs, inflation, and supply chain disruptions. Hospitality businesses, particularly smaller establishments, operate on thin profit margins. The increased NICs will further erode these margins, making it harder to remain profitable. Coupled with a significantly lowered earnings threshold, this measure is poised to inflate operational costs for establishments. Many SMEs, restaurants and hotels across the country have already been forced to consider staff reductions to mitigate the financial impact. 

Impact on business financial health

Businesses already struggling with debt or cash flow issues will be particularly vulnerable to the added financial strain. The increased costs could be the final straw for many struggling venues, pushing them into insolvency. The latest figures from March show that January 2025 saw a dramatic 21% surge in hospitality insolvencies compared to the previous month, escalating from 225 in December 2024 to 273. This upward trend is further underscored by a 3% year-on-year rise compared to January 2024. To mitigate the increased costs, businesses may resort to reducing staff numbers or cutting working hours. This could lead to increased unemployment within the sector and a decline in service quality.  

Moreover, there is a chance that investors will now think twice before investing in essential upgrades or expansions, hindering their ability to remain competitive. This lack of investment could lead to a downward spiral, further increasing the risk of insolvency.

Simultaneously, the drastic reduction in business rates support will impose substantial rate bill increases. This, in turn, has made restaurants and pubs face average hikes of 140%. This surge in fixed costs presents a daunting challenge, potentially triggering widespread closures and job losses.

Business leaders have already expressed deep concern over these budget measures, warning of unsustainable cost pressures that could lead to price hikes, reduced investment, and suppressed wage growth. The combined effect of these fiscal policies raises serious questions about its long-term viability and resilience.

Financial squeeze threatens small restaurants and business, while global giants can thrive

Based on the current economic scenario as explained above, the UK’s vibrant independent restaurant scene faces an existential threat. Rising employment costs and tax burdens have created an uneven playing field, favouring deep-pocketed fast food chains. There is a good chance that the Chancellor’s upcoming budget will disproportionately penalises smaller, local restaurants.

Global giants like McDonald’s and KFC, bolstered by automation and economies of scale, are poised to weather these financial storms. At the same time, independent venues are facing closure or conversion into US fast food chains. This stark contrast highlights the growing disparity, where local culinary gems struggle under mounting pressure, while well-funded international chains expand their dominance on UK high streets. The fear is that the British food scene will lose its unique character, replaced by a homogenous landscape of fast food outlets.

Uncertainty before the Spring Budget of 2025

In the lead-up to the UK Spring Budget announcement on 26 March 2025, the hospitality industry has actively voiced concerns and recommendations, highlighting the severity of the situation. Industry leaders are urgently calling for financial relief, including a reduction in VAT to 12.5% and a temporary lowering of employer National Insurance contributions to 10%, warning of “irreversible damage” without such support. 

Increased operating costs will stifle business investment in crucial areas like digitalisation and innovation, hindering sector growth and long-term sustainability. This financial strain could also impede larger businesses’ transition to lower-carbon operations. This is especially true for hotels looking at the adoption of intelligent building management systems, which require substantial initial investment.

Insolvency News | Hospitality leaders demand reversal of eco tax, citing price hike fears

A united front of UK pub and restaurant executives is demanding the government abandon the EPR packaging tax, citing a direct threat to consumer affordability. The tax, penalizing packaging weight, disproportionately burdens glass bottles, potentially adding significant costs to wine (12p per bottle) and beer (6p per pint). 

Industry heavyweights like Stonegate, Fuller’s, and Burger King have collectively denounced the levy, stating they have no choice but to pass on supplier-imposed price hikes. UKHospitality, the sector’s leading voice, has issued an urgent plea for immediate government intervention. They have emphasised the necessity of exempting the hospitality sector from these punitive fees to protect the affordability of a quintessential British night out and prevent a domino effect of business closures and job losses. This united industry stance underscores the gravity of the situation, highlighting the existential threat this tax poses to UK’s hospitality industry.

Case Study | Pizza Hut’s pre-pack acquisition

Pizza Hut UK, a long-standing fixture in the British dining scene, operates a network of dine-in restaurants and delivery outlets across the country. It’s a familiar brand, offering a variety of pizzas and related menu items to a broad consumer base

Financial difficulties faced 

Mounting financial pressure: Heart With Smart Restaurants, the Pizza Hut UK franchise operator, faced escalating financial pressures stemming from tax hikes announced in the Autumn Budget. The company, previously owned by the management team and backed by Pricoa, struggled to maintain profitability under these increased financial burdens.

Urgent need for acquisition: Heart With Smart had been actively seeking buyers since November to avoid potential collapse.  The company also joined with 220 other hospitality businesses to warn the government about the effects of the tax increases. Without a buyer, the business would have been forced into liquidation, leading to the loss of thousands of jobs. 

Proposed solution 

Interpath Advisory, appointed as joint administrators, facilitated a pre-pack administration process, enabling the immediate sale of the business and its assets to DC London Pie, a subsidiary of Directional Capital.  This swift action ensured the continuity of Pizza Hut’s UK dine-in operations, preventing widespread closures and job losses.

Directional Capital, with existing Pizza Hut operations in Sweden and Denmark, strategically expanded its European portfolio through this acquisition.  This move strengthened the company’s food and beverage platform, consolidating its presence in the European and UK markets.

Overall impact

The acquisition successfully safeguarded approximately 3,000 jobs, mitigating the potential economic and social impact of widespread unemployment.   

139 Pizza Hut dine-in restaurants were preserved, ensuring its continued operations. At the same time Directional Capital solidified its foothold in the European food and beverage market. This not only helped them build market confidence in the UK restaurant sector but also showcase that even in times of economic distress, the right investments can make a world of difference.