A new tourism tax is to be introduced in the UK

As Britain anticipates Chancellor Rachel Reeves’ Autumn Budget on November 26, 2025, the latest buzz from Westminster suggests potential fiscal pinches. To fill the reported £20bn funding gap without raising headline income tax, Reeves is considering an “overnight tourism tax” on accommodation and extending the sugar tax to include milkshakes and lattes – a “shake tax”, if you will. This promise by the government to ease the cost of living has, unsurprisingly, drawn criticism from industry leaders and the opposition.

Tourism tax: A hidden VAT increase for accommodation?

The main idea behind the debate involves empowering English municipalities to impose a “nightly charge on hotels, B&Bs, and rentals like Airbnb”. Similar to the systems in Scotland and Wales, The tax revenue will fund local public transportation, infrastructure, and services pressured by high tourism.

Supporters argue that the UK is lagging behind other developed countries without such a tax, planning to integrate it through the Level Up and Regeneration Act. Others, including Mayor of London Sadiq Khan and Andy Burnham of Greater Manchester, have strongly advocated for it. Those mayors jointly wrote to Reeves and the culture secretary last summer, calling it a potentially “important tool” for local investment. In Manchester alone, a modest charge of £1-£5 can generate an estimated £8-£40 million a year, depending on the exact price set.

However, the hospitality sector is showing serious concern. UKHospitality, which represents pubs, restaurants and hotels, warns that a levy of just 5% – the same as Edinburgh’s planned rate from July 2026 – could raise effective accommodation tax to around 27% when factoring in the standard 20% VAT, as well as the VAT itself. This could put the UK among Europe’s most expensive tourist destinations, potentially adding £518 million a year to British holidaymakers who spend more than 255 million nights in the UK each year.

Kate Nicholls, director of UKHospitality, said that although “the government says it is concerned about the cost of living,” the holiday tax is a “stealth increase in VAT”. He sees this as fueling price hikes and inflation. She called it a “stunning U-turn,” recalling earlier assurances that such a tax was not planned. As the sector deals with recent national insurance increases and minimum wages, some fear business closures, potentially driving Britain to cheaper destinations such as Mallorca, already seeing a rise in demand.

Lessons from North of the Border

Scotland and Wales are already moving forward with similar taxes. Edinburgh’s 5% visitor levy starts next summer, while Welsh councils can charge up to £1.30 per night from April 2027. Supporters point to this as a possible win, focusing on “real economic impact” when providing funds, perhaps as Madrid Mayor Jose Luis Martínez Almeida puts it. UK Hospitality, however, argues that this has not solved the tourism problem and could harm the competitiveness of domestic tourism.

Milk Tax: Sugary foods go sour

Adding to the potential financial pressure, Reeves is reportedly planning to strengthen the Soft Drinks Industry Levy (SDIL), the 2018 “sugar tax”. The expansion – considered in the April 2025 Treasury consultation – removes exemptions for milkshakes and flavored lattes, as well as plant-based milk alternatives. Also, it drops the sugar level from 5g to 4g per 100ml, potentially taxing “203 pre-packaged milk drinks”, which make up 93% of category sales, unless manufacturers reform. The government estimates the move could generate “an extra £50-£100 million a year”, capitalizing on SDIL’s previous success encouraging businesses to reduce sugar content (the Treasury points out that young people get just 3.5% of their calcium from such drinks). A proposed “lactose allowance” would naturally exempt milk sugar, focusing only on added sweeteners. However, industry representatives, including shadow chancellor Mel Stroud, criticized it as a “sucker punch” that would affect families already struggling with rising costs. Stride said Labour’s proposed tourism tax unfairly penalizes an industry that has already shown a commitment to reducing sugar.

Fiscal discipline or voter reaction?

Such proposals are part of the £7.5 billion tax revenue strategy, which includes frozen income tax thresholds that could push significant numbers of individuals into higher tax brackets. Reeves, in the wake of the bond market’s volatility, has refrained from increasing revenue growth, maintaining that its main goals are “lowering the cost of living, reducing debt, and strengthening the economy.” The Treasury declined to comment on the details, saying they do not speculate on future budget measures.

However, amid forecasts of declining production and global challenges such as tariffs and inflationary pressures, Reeves is developing a critical situation. The Institute for Government estimates a potential revenue shortfall of £10 billion if economic growth slows. For those in the tourism and hospitality sectors, the equation is clear: rising domestic prices can lead to lower spending at home, and more abroad.

As the budget approaches, one point is clear – the chancellor’s pursuit of fiscal stability risks exacerbating the very inflationary pressures he is seeking to control. British holidaymakers hoping for a summer break or an after-dinner milkshake may soon find themselves drawn to more affordable destinations abroad.