UK retailers are facing mounting pressure from higher business taxes, employment costs and energy bills as shop price inflation reaches its highest level since February 2024.
More than eight in ten UK consumers are concerned about rising prices, adding to the challenge of maintaining affordability and profitability.
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UK retailers are finding it increasingly difficult to absorb rising operating costs following the Chancellor’s 2026 Budget, according to the British Retail Consortium (BRC).
The trade body’s latest research shows that 83% of UK adults are concerned about rising food prices, while 82% are worried about inflation.
The findings come as shop price inflation rose to 2.1% in October, up from 1.4% in September. Annual food price inflation also increased to 2.9%, adding to pressure on household budgets.
The BRC says retailers have absorbed some of their rising costs to limit price increases for customers. However, higher business taxes, employment expenses and energy bills are making this increasingly difficult.
The organisation argues that the Budget has offered insufficient relief, particularly for medium-sized and larger retailers facing substantial operating costs.
Shop price inflation accelerates
The BRC’s October Shop Price Monitor shows that inflation has accelerated across both food and non-food retail.
Non-food inflation rose to 1.7%, up from 0.8% in September, while food inflation increased from 2.5% to 2.9%. Fresh food inflation remained unchanged at 2.6%.
The figures show that price pressures extend beyond groceries to other retail categories. Retailers continue to face higher transport, energy, employment and other operating expenses.
BRC chief executive Helen Dickinson said: “The cost of living remains a top concern.”
She noted that households, retailers and the Government shared an interest in easing pressure on family finances.
The BRC argues that retailers’ ability to maintain competitive prices depends partly on controlling the costs of running their businesses.
Business taxes add to retail costs
Business taxation remains a significant concern for UK retailers, particularly those operating large store networks.
The BRC estimates that the sector will face £41 billion in business taxes during the 2026/27 financial year, representing a 20% increase over two years.
Although retail accounts for approximately 5% of the UK economy, it pays more than 20% of business rates, according to the trade body.
Business rates are taxes on commercial properties, including shops and warehouses. They represent a substantial fixed cost for retailers with physical premises.
The BRC estimates that a planned 3.5% increase in business rates from April 2027 will add approximately £250 million to retailers’ costs.
The Government has announced measures to ease the burden, including a two-year real-terms freeze in business rates for retail, hospitality and leisure properties.
It also plans to extend small business rate relief, enabling a further 70,000 businesses across these sectors to pay no business rates.
However, the BRC argues that these measures will provide limited relief for medium-sized and larger retailers, which continue to face substantial property-related expenses.
Employment costs put retail jobs under pressure
Higher employment costs are adding to financial pressures across the retail sector, with potential consequences for recruitment and job creation.
According to the BRC, retailers’ employment costs have increased by £6.5 billion over the past two years. More than £2 billion of that increase resulted from changes to employers’ National Insurance contributions (NICs), which help fund the UK’s social security system.
The trade body also reports that 122,000 retail jobs have been lost over the same period.
It estimates that the latest Budget will add a further £2 billion to retailers’ employment costs, citing increases in the National Living Wage and the absence of reductions in employer NICs.
Dickinson has acknowledged retailers’ commitment to fair pay but warned that rising employment expenses could make it harder for businesses to maintain staffing levels.
The pressure is particularly relevant to younger people seeking their first jobs. According to the BRC, one in five people begin their careers in retail, which provides entry-level opportunities in stores, warehouses and distribution centres.
The organisation warns that rising labour costs could limit retailers’ ability to create jobs for young people, including those not in employment, education or training.
Energy bills add £440 million to retail costs
Rising electricity bills are creating further financial pressure on retailers, particularly businesses operating large stores, warehouses and distribution facilities.
The BRC estimates that retailers’ electricity costs will increase by £440 million this year, despite little change in energy consumption.
The trade body attributes part of the pressure to non-commodity charges. These cover electricity network costs and government policy-related expenses rather than the wholesale price of electricity.
Such charges now account for approximately two-thirds of retailers’ electricity bills, according to the BRC. This means businesses can face higher energy costs even when their electricity consumption remains stable.
The Government has announced measures intended to reduce energy bills and improve conditions for businesses. It has also outlined plans to separate gas and electricity prices in future.
However, the BRC argues that further support is needed to reduce energy costs for retailers and their supply chains.
Lower electricity expenses, it says, would give businesses greater scope to manage operating costs and limit price increases.
Online marketplaces face VAT changes
The Budget also includes changes to VAT collection by online marketplaces.
Under the Government’s plans, online marketplaces would be required to collect VAT on behalf of businesses selling goods through their platforms.
The measure is intended to improve tax compliance and ensure that online sellers meet their VAT obligations.
The BRC supports consistent VAT collection across online and physical retail but has called for the new requirements to be practical and proportionate. It argues that the changes should avoid unnecessary administrative costs for businesses that already comply with tax rules.
The Government is also reducing tariffs on more than 100 food and drink products to lower import costs.
Although the BRC welcomes efforts to reduce the cost of food imports, it believes the tariff changes will have a limited impact on the wider financial pressures facing supermarkets.
Another concern is the continued absence of a tax-free shopping scheme for international visitors. The BRC argues that this could affect spending by overseas shoppers and the competitiveness of UK retail destinations.
Retailers face difficult pricing and investment decisions
The combined impact of higher business taxes, employment expenses and energy bills is increasing pressure on UK retailers’ operating margins.
Businesses must decide how much of these costs they can absorb while remaining competitive and maintaining profitability.
Passing more costs on to customers could prove difficult when household budgets are already under pressure. The BRC’s latest research highlights this challenge, with 83% of adults concerned about food prices and 82% worried about inflation.
At the same time, higher operating expenses can reduce the funds available for store investment, recruitment and business expansion.
The BRC argues that reducing the sector’s cost burden would help businesses maintain competitive prices, support employment and invest in their operations.
For UK retailers, the challenge is to manage rising costs while protecting affordability, maintaining customer demand and sustaining long-term financial stability.
