Rachel Reeves weighs a ‘hotel tax’ as treasury battles to fill funding gap

Britons and foreign visitors may soon find themselves paying a “hotel tax” on every night they stay, under Treasury proposals designed to shore up the public purse as borrowing costs continue to rise.

The potential tax, part of “modeling exercises” being carried out by officials, mirrors tourist taxes in countries such as France, where nightly fees range from less than £1 at a campsite to more than £12 in five-star accommodation.

Chancellor Rachel Reeves, who introduced £40bn in tax rises in last autumn’s Budget, has repeatedly insisted there will be no repeat of those rises. However, falling bond prices and the highest government borrowing rates since 2008 mean it may soon have to find new sources of revenue. Analysts say that unless taxes rise or spending falls, Reeves risks breaching self-imposed fiscal rules – a scenario that could erode market confidence in the UK’s economic stability.

Under the upcoming national scheme, both domestic travelers and foreign visitors will pay additional fees for their overnight stay. This comes as many parts of the UK explore domestic tourism charges. Wales is proposing a £1.25 nightly charge for visitors, while Edinburgh will impose a 5 per cent tax on accommodation from July 2026. According to the Taxpayers’ Alliance, rolling out the Welsh model across England would generate around £560 million a year. However, adopting something closer to the French system could generate more than £1bn.

Hotel owners warn of dire consequences. Sir Rocco Forti, whose eponymous hotel group has a global footprint, says the measure would amount to a “harmful new tax” that comes on top of increases in employers’ National Insurance, higher air travel charges, and the scrapping of VAT refunds for foreign tourists. He believes it will hit the entire tourism supply chain – from restaurants and museums to taxi drivers and shops – as visitors curb spending to offset the rising cost of accommodation.

Reeves, who is currently on a high-level visit to China with the aim of attracting inward investment, has been criticized for the timing of her trip. British government bond yields have risen in recent days, as so-called “bond market vigilantes” demand higher yields in exchange for holding UK debt, pushing up government borrowing costs. Meanwhile, the pound fell below $1.22, a decline that makes Britain cheaper for travelers from abroad, but also raises concerns about inflation caused by imports.

If borrowing costs remain high, the Treasury could look beyond the hotel tax to keep the Chancellor’s fiscal covenants intact. More significant measures may include increases in corporate tax or reductions in welfare and disability benefits. Observers point out that the spring statement, scheduled to be issued on March 26, could become a de facto emergency budget if market conditions fail to improve.

Sir Rocco Forte’s condemnation of the hotel tax reflects growing discontent in the tourism sector, which maintains that the hospitality sector already bears heavy taxes and regulatory costs. He points out that many other countries impose tourism tax fences on their revenues to enhance visitor facilities. By contrast, he fears the UK’s plan to direct revenues will simply fill a “black hole” in public finances.

Despite the protests, Treasury insiders have remained tight-lipped, describing talk of a new hotel tax as “speculation.” A spokesperson insisted the Chancellor would stick to her financial rules and continue to monitor spending. Ministers plan to review expenditure in June to “root out waste”, but industry observers say the new tourism tax threatens to undermine one of the UK’s most vital sectors.

Ultimately, the Finance Minister’s ability to balance his books without a new round of tax increases will depend largely on market sentiment. As the cost of government debt rises, so does the political imperative to find sources of revenue that avoid a repeat of the massive tax increases passed last fall. The final decision could depend on whether an increasingly value-conscious travel market is willing to pay an additional overnight fee for the privilege of visiting Britain’s beaches.