By Rob Garner

In August, I explored the potential impact of the new Labour Government on the UK consulting sector in a blog post titled “The Impact of the New Labour Government on UK Consulting Services: Navigating Uncertainty and Identifying Opportunities.” My conclusion was cautiously optimistic, suggesting that while the government’s commitment to cutting consulting spend could be a challenge, the focus on digital transformation, AI, and clean energy offered growth opportunities for the sector.

Now, following the Labour Government’s Budget announcement on October 30, it’s time to reassess: has the budget reinforced this outlook, or have new challenges emerged?

Key Budget Changes Affecting Professional Services

The recent Budget introduced a few headline-grabbing changes that will impact professional services, including:

  • Employer’s National Insurance (NI) rate increase
  • Changes to the Capital Gains Tax (CGT) regime
  • Further departmental budget reductions planned for FY26 and beyond

On a more positive note, consulting has been explicitly recognised as one of the eight priority industries in the Labour Government’s industrial strategy, reflecting its importance as a £7bn export revenue contributor.

1. The Employer’s NI Increase: Minimal Impact for High-Margin Sectors

The rise in Employer’s NI has been a contentious issue in the press, sparking debate about potential broken promises and the implications for businesses. However, the professional services sector is generally characterised by low volume, high margin operations, where annual pay settlements often outpace the 1.2% increase in NI.

While the change may be unwelcome, it is unlikely to alter behaviour or strategy significantly for consulting firms. For industries with tighter margins, this increase might be more impactful, but for consulting, the effect will likely be minimal.

2. CGT Changes: A Gradual Adjustment

The adjustments to the CGT regime, including a rise in the higher band rate from 20% to 24%, were less drastic than many predicted. Crucially, Business Asset Relief (formerly Entrepreneurs’ Relief) remains unchanged until April 2025, with only gradual reductions thereafter.

This means that any immediate impact will be limited to a small subset of firms or founders planning imminent exits, rather than the wider professional services landscape. While significant for those affected, the changes are unlikely to cause major disruption or alter business strategies in the near term.

3. Departmental Budget Cuts: Pressure on Public Sector Consulting

The planned reduction in departmental budgets presents a more concerning challenge, particularly for firms heavily reliant on public sector consulting. This adds credibility to the Labour Government’s pledge to cut public sector consulting spend by 50%, as departments may simply lack the funds to sustain current engagement levels.

However, based on past experience, these cuts are not guaranteed to materialise at the stated levels. While firms specialising in public sector consulting will need to adapt, the long-term impact remains uncertain.

A Major Opportunity: Consulting in the Industrial Strategy

The inclusion of consulting as one of the eight priority industries in the Labour Government’s new industrial strategy is a significant milestone for the sector. This recognition positions consulting as a vital contributor to both domestic and international growth, potentially unlocking new opportunities across:

  • Export markets
  • Clean energy projects
  • Digital transformation and AI initiatives

While the government’s commitment to reducing its own consulting spend appears contradictory, this broader industrial focus bodes well for the sector’s future.

The Bigger Picture: Budget Impact on Market Sentiment

Despite some of the budget’s unwelcome changes, new business activity has noticeably increased in the firms I am involved with since the announcement. This suggests that businesses, having awaited clarity from the budget, are now moving forward with confidence. The implications may not be as severe as anticipated, prompting a renewed focus on strategic initiatives.

A Balanced Outlook for the Future

So, has the budget helped or harmed the professional services sector?

  • The Employer’s NI and CGT changes are relatively minor for consulting firms and unlikely to drive significant behavioural shifts.
  • The further reduction in departmental budgets will impact public sector consulting but is consistent with previous challenges.
  • The recognition of consulting in the industrial strategy offers an exciting opportunity for long-term growth.

While challenges remain, the professional services sector stands poised to navigate these changes and capitalise on emerging opportunities, especially in high-growth areas like digital transformation and clean energy.

For consulting leaders, the key takeaway is clear: embrace the opportunities presented by the industrial strategy while preparing to adapt to evolving public sector dynamics. The future remains bright for those ready to seize it.