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U.K. supermarkets Marks & Spencer (M&S) and Tesco reported strong holiday sales on Thursday but cautioned that they face escalating costs in 2025 as a result of tax changes and persistent inflation. Both companies anticipate significant financial strain due to an upcoming increase in the National Insurance rate, a payroll tax used to fund social programs.

Strong Sales But Growing Challenges

M&S posted a 5.6% rise in sales for the third quarter, while Tesco, the nation’s largest supermarket chain, saw sales increase by over 4% during the same period. Despite these gains, both retailers are preparing for a challenging economic landscape.

“This was another good Christmas for M&S, building on a strong performance in the prior year,” said Stuart Machin, CEO of Marks & Spencer. “The external environment remains challenging, with cost and economic headwinds to navigate, but there is much within our control.”

Machin emphasized that the company is not complacent about its future prospects, citing rising tax burdens, inflation, and fluctuating interest rates as key concerns.

Tesco echoed these sentiments, projecting an additional £200 million in costs from the National Insurance rate hike alone.

National Insurance Hike and Broader Economic Pressures

The British government’s October 2024 budget introduced a £40 billion ($49 billion) fiscal package that includes raising the employers’ National Insurance rate from 13.8% to 15%, effective April 2025. The change is expected to generate £25.7 billion annually by the decade’s end, according to HM Treasury.

The tax hike comes amid broader inflationary pressures that have already strained the retail sector. The British Retail Consortium (BRC) warned on Thursday that inflation eroded much of the sector’s 2024 sales growth and predicted a decline in sales for 2025. Retailers may face difficult decisions, including cutting investments and jobs, to offset rising costs.

Industry-Wide Concerns

“Inflation and tax changes are a double hit for the retail industry, leaving many companies with no choice but to make tough cuts,” said a spokesperson for the BRC.

While Christmas sales offered a temporary boost, supermarket giants like M&S and Tesco are now grappling with how to maintain profitability and growth in an increasingly difficult economic climate.