DOI: https://doi.org/10.58248/RR102
What are business rates?
Business rates are a tax levied by local councils on non-domestic properties in the UK, including shops, offices, warehouses, factories and pubs. The amount a business pays is calculated by multiplying the property’s rateable value (RV, an estimate of its open market rental value, assessed by the government’s Valuation Office Agency) by a tax rate (the multiplier) set by central government.
The current standard multiplier is 55.5p. So, if rateable value is £100,000, the rate payable per year would be £55,500. RVs are updated periodically, with the latest revaluation being in 2026.
The business rate is paid by the occupier if they rent the property, and the owner if not.
Business rates matter for several reasons:
- Business rates are a significant fixed cost for businesses, alongside rent and wages.
- They put a greater tax burden on businesses that require more physical space, so they have been widely criticised for favouring online businesses over high street competitors.
- The revenue from business rates, around £28.8 billion in 2024/25, funds local government services.
What reliefs are available for business rates?
Until April 2026, the system used two major reliefs, Small Business Rate Relief (SBRR), and Retail Hospitality and Leisure relief (RHL), which were designed to offset the effects of the system on small and retail businesses (PDF). The digital services tax also addresses this bias against “bricks and mortar” businesses.
SBRR, introduced in 2005, gives 100% relief for eligible properties with rateable value of £12,000 or less, with a taper up to RV of £15,000, at which point the relief is entirely withdrawn. A property is eligible for SBRR only if the property is occupied by a small business, defined as a business with only one property. Until 2026/27, RHL gave eligible properties a discount of 40% off their business rates bill, subject to a cap of £110,000 per business per year.
As from April 2026, RHL has been replaced with a system of lower multipliers for RHL properties with a RV of less than £500,000, as further discussed below.
How much revenue do business rates raise?
Figure 1 below shows that as of 2025, business rates contribute 2.5% of total tax revenue. Revenue from business rates declined significantly between 2019 and 2020, and stayed much lower after that, due to the very high rates of RHL relief given during the covid-19 pandemic. This figure also shows the relative importance of business rates as a source of revenue.
Before the introduction of RHL relief, business rates were a major revenue raiser, raising approximately two-thirds of the amount from corporation tax, and nearly as much as council tax. Since the introduction of RHL, the financial contribution of business rates has declined significantly.
As figure 1 suggests, these reliefs, notably RHL relief, are very costly in terms of foregone tax revenue. For example, for 2024/25, RHL relief cost £2.5 billion, and SBRR £2.1 billion. Internationally, the share of total government revenue from business rates is high by OECD (Organisation for Economic Co-operation and Development) standards; by this share, the UK is ranked third highest of 18 OECD countries.
How have business rates changed since 1990?
Before 1990, local authorities set business rates independently and retained the revenues (PDF) [10]. The Local Government Finance Act 1988 fundamentally restructured the system. From April 1990, business rates were removed from local authority control and replaced by the National Non-Domestic Rate (NNDR). In this new system, the tax rate for all local authorities is set by central government; revenues are pooled nationally and redistributed to local authorities through the Revenue Support Grant.
Following the Local Government Act 2003, several rate reliefs were introduced to the system. First, SBRR was introduced in 2005 to support small businesses, with the current form of SBRR in place since 2017. In 2019 in response to the expansion of e-commerce and resulting decline in high street footfall (PDF), the government introduced Retail Relief (now RHL relief) as a targeted measure for retail business properties with RV below £51,000. During the covid-19 pandemic, Retail Relief was extended to help prevent widespread firm failure; in April 2020, a 100 per cent business rates holiday was granted to all retail, hospitality and leisure properties, which was then extended to July 2021.
Since 2021, the rules for RHL relief have changed almost every year in several ways, which some argue has created uncertainty for business. First, the relief rate (the percentage reduction in business rates payable) has changed nearly every year:
- 50% in 2022/23
- 75% in 2023/24 and 2024/25
- 40% in 2025/26.
Second, the eligibility rule has changed from one based on RV to one based on the amount of relief given, with a cap.
What changed in April 2026?
In April 2026, the government introduced a major reform to the business rate system. [18] First and foremost, the reliefs have been replaced by lower tax rates for small and medium properties as defined by RV. The lowest tax rates apply to properties with RV of below £51,000 (the old RHL relief threshold) and the highest rate applies to large properties of RV over £500,000. An intermediate rate applies to medium properties with RV between these two limits. Within each eligibility band, there will be a further reduction in the tax rate specifically for RHL properties. These new tax rates will apply to RVs based on the 2026 revaluation.
Given the very large increase in the eligibility threshold, significantly shifts the business rates burden to properties used by large companies, such as distribution centres. The government claims that this reform will lower the amount of business rate paid by over 750,000 properties by an aggregate £900 million. However, for an impactful change, the reform may also require the government to keep these lower taxes and higher eligibility thresholds stable over time.
What are the economic impacts of business rates reform in the UK?
Existing research on the economic impacts of business rates focuses on employment effects, property occupancy and rents. These impacts may be indicating potential effects on the high street and business growth.
An academic study of UK manufacturing businesses in neighbouring local authorities in 1984 to 1989 (before the introduction of a single national rate) found that a 1% higher business rate reduced the number of employees at the average establishment by about 1%, while having no effect on new business entry.
Another study by Professor Ben Lockwood and colleagues compared the vacancy rates (share of properties unoccupied and available), types of occupants, and rents on either side of the eligibility thresholds for SBRR and Retail Relief in 2018/19. It found that business rates, while raising substantial revenue, also contribute significantly to high vacancy rates. The authors suggested that the reforms that have been introduced for 2026/27 with lower tax rates for a much wider range of properties, particularly in the RHL sectors will have positive and potentially large positive effects on occupancy rates. However, further research is needed to look at some other metrics such as employment growth.
Vacancy rates
Comparing properties eligible for Retail Relief (with rateable value below £51,000) with those that are not eligible, the research found that a 1 percentage point reduction in the tax rate reduced the vacancy rate for eligible properties by 5% (and therefore that a 1 percentage point increase in the tax rate increased the vacancy rate by 5%).
The effect is similar for properties in retail clusters (the high street) and others. These findings indicate the Retail Relief discount (of one third) in 2018/19 effectively reduced the vacancy rate by up to 80% for the eligible properties with rateable values around the £51,000 threshold, compared to the period before it was introduced.
The research found that the Retail Relief was approximately six times as effective as SBRR in reducing the vacancy rate for the same amount of relief expenditure per property.
Occupancy for small businesses
However, arguably, the main objective of SBRR was not the reduction in the vacancy rate, but to lower the cost of properties for small businesses, and here it was effective. The researchers found that 1 percentage point reduction in the tax rate via SBRR increased the likelihood that a property is occupied by small business by 1.06% and reduced the chance it is occupied by large business by 0.53%.
Rents
As business rates are paid by tenant for rented properties, landlords may try to capture some of the value of the relief by increasing rents, thereby reducing the overall value of the relief for tenants.
A study from 2015 found that a £1 reduction in the business rates tax from the Small Business Rate Relief resulted in a rent rise by £0.15 to £0.32.
This is consistent with an earlier study for the period 1987 to 1992, which compared rents on properties in locations that were differentially affected by the introduction of the NNDR in 1990. It found that a £1 reduction in business rates tax was followed by £0.45 to £0.85 higher rent rise in two years’ time.
Acknowledgements
Professor Ben Lockwood is a Professor of Economics and Programme Director at the Centre for Business Taxation, University of Oxford. Dr Eddy Tam is a Lecturer in Economics at King’s Business School, King’s College London. POST is grateful to the authors for kindly giving their time to produce this briefing.
Questions about this briefing should be referred to Natasha Mutebi ([email protected]), who acted as parliamentary lead for this work.