UK manufacturing enters Q2 busy but squeezed. Demand is there, yet uneven output and stubborn costs mean hard work does not automatically become profit.
In Gross Value Added terms, ONS data shows that manufacturing generated 8.8% of UK economic output and 7.9% of employment in Q2 2025. In this sense, the sector’s relevance is not in doubt, but the challenge is how comfortably it can operate in a year that looks set to be steadier than the last, but far from simple.
Productivity has cooled, but not ceased. The ONS estimates that GDP fell by 0.1% in October 2025, and was also down 0.1% over the three months to October versus the previous three-month period. That is not a recession, but it is the difference between moving forward and rolling in place.
The outlook for this year is more modest. The Treasury’s mid-2025 round-up of independent forecasts put expected GDP growth at 1.1% in 2025 and 1.2% in 2026. The OBR was similar on its 2025 review at 1.0%, but did project a more optimistic 1.9% for 2026, giving manufacturers cautious hope for growth.
So the real question, with costs still sticky and competition sharp as ever as the market competes on price, is whether profits can be protected while the economy grinds back into gear.
Manufacturing still commands a premium because skill costs. The ONS puts the UK’s median full-time pay at £39,039 (April 2025), up 4.3% year on year, and manufacturing typically sits comfortably above that midpoint - making the profession one that pays well for hard-earned experience and labour.
However, the production story is decidedly unsettled. Output rose just 0.5% in October 2025, while the wider trend over the three months to October was down more than that (0.7%), with transport and logistics seemingly in decline.
Investment, as to be expected, remains reticent. Business investment fell by 0.3% in Q3 2025, suggesting that businesses are still paused for thought and holding back on major spending decisions - perhaps avoiding ‘pressing the button’ on weighty decisions until signs of an economic uptick. If ONS estimates in 2026 pivot from projections to palpable payoffs, it may well be time.
The Autumn Budget was abundantly clear on the direction of travel: invest, but be intentional about its timing and structure.
Since 1 January, a new 40% first-year allowance now applies to qualifying main-rate plant and machinery, including most leased assets and spend by unincorporated businesses. For capital-intensive manufacturers that lease equipment, this brings relief forward and improves early cash flow.
But there is a trade-off here. Main-rate writing-down allowances will fall from 18% to 14% from 1 April for corporation tax and 6 April for income tax, effectively slowing relief on the leftover value of plant and machinery that is written off over time.
The message is this: while incentives remain, the slower, year-by-year relief is being tightened. Alongside reforms to the merged R&D tax relief regime, relief can still be attractive, but it is becoming more conditional and ever more complex.
Payroll: wages affect performance, not just costs. Pay is rising even as growth cools, and that combination exposes weak productivity at pace. A plant can be busy and still quietly lose money through overtime creep, clumsy shift patterns, rework and unbalanced workloads.
The fix is an unglamorous but effective one: make sure to measure your labour productivity by line and shift, tighten overtime rules where possible, and track where time is really going in day-to-day practical terms. This should cover everything from set-up and changeovers, waiting for materials, instructions, approvals, maintenance support, or the next process step, all the way through to admin.
Capital allocation: tax relief now depends more on timing. Capital allowances are increasingly about when and how you spend, not just whether you choose to. Since January, faster relief is now available via the 40% first-year allowance for a qualifying investment. From April, relief on main-pool balances slows as writing-down rates fall.
In practice, capital may feel especially scarce, but it is being steered. Projects that are able to cut recurring costs and improve resilience, while keeping a watchful eye on energy use, downtime, changeovers, data capture and more, can still justify themselves on operational payback alone.
Manufacturers don’t need a tarot deck to forecast the next quarter - they need cleaner numbers and quicker choices.
Rebuild your budget with realistic volume assumptions and today’s elevated wage, energy and financing costs in mind, then overlay against next year’s new allowances.
Then, take the time to tighten up your investment priorities. Be clear on which initiatives actually improve productivity, minimise your energy use or waste, or make operations inherently more reliable. Importantly, note which ones are supported by the tax system and which ones would be standalone risks. If an initiative only clearly delivers one core benefit, challenge whether it is the right use of time and cash.
Finally, treat R&D and process improvement as structured work that must be diligently accounted for, not a ‘nice to have’ spare-time activity. Under the merged regime, value is still available, but only where the work is clearly defined, costs are tracked and documentation is robust.
Q2 is unlikely to deliver effortless growth, but it is quietly promising a slow upward climb. Demand looks steady, rather than spectacular, costs will keep testing margins and reliefs will increasingly reward businesses that can evidence what they are doing and why. But the fundamentals remain strong: high-value output, skilled jobs, deep regional roots and a central role in the net zero transition bode especially well for the sector.
The manufacturers who succeed will be those with a clear sight of their numbers, a deliberate investment strategy and the confidence to align decisions with areas where policy (or legacy ‘business as usual’) is pulling productivity.
Duncan & Toplis works with manufacturers across the UK on forecasting, Sage Business Planning, R&D and tax reliefs, and wider business advisory support. To find out more, please contact us.
