The Budget 2025 translates strategic ambition into funded programmes with clear timelines. For defence companies, including primes contractors, SMEs and startups, the opportunity lies in aligning commercial strategies with the Government's dual objectives: enhanced military capability and defence as an engine for economic growth.
Defence spending set to reach 2.6% of GDP with £5 billion immediate investment
The Government has provided £5 billion in additional defence funding for 2025-26 alone since the start of the Parliament, with UK defence spending set to reach 2.6% of GDP in 2027. This represents the largest sustained increase since the Cold War and delivers on commitments made in the Strategic Defence Review, which framed the acceleration to 2.5% GDP by 2027 with an ambition for 3% in the next Parliament.
The Budget announcement translates strategic ambition into immediate funding, creating substantial opportunities for defence contractors across multiple sectors.
Sovereign munitions capability
The Budget's most significant sectoral commitment targets energetics and munitions manufacturing. The Government has committed £1.5 billion over the Parliament for energetics and munitions, with construction starting next year after identifying 13 potential factory sites.
This builds on the Government's commitment in the Strategic Defence Review to commit a further £6 billion to munitions investment this Parliament, which includes an "always on" pipeline and at least six new UK energetics and munitions factories. The Budget announcement accelerates this timeline and expands the factory footprint from six currently identified sites by identifying another 7 potential sites.
Companies with energetics manufacturing capability, explosives handling expertise, or relevant supply chain positions should prepare for major procurement opportunities in 2026. The "always on" pipeline model represents a fundamental shift from episodic procurement to continuous production, requiring different commercial structures and long-term capacity commitments. This commitment is a direct response to the weaknesses exposed in the UK's war readiness posture during the ongoing conflict in Ukraine, which is a result of historical underinvestment in manufacturing capacity.
Norway Frigate deal: £10 billion international collaboration
The Government has signed a major frigate deal with Norway worth £10 billion, supporting over 4,000 UK jobs including 2,000 in Scotland, delivering a transformative boost to Glasgow's shipbuilding sector and supporting 432 businesses in the supply chain.
This exemplifies the Defence Industrial Strategy's emphasis on deepening cooperation with NATO allies whilst maintaining sovereign capabilities. The deal structure demonstrates how international collaboration can deliver both military capability and substantial UK economic benefit.
With 432 businesses involved, this creates opportunities well beyond prime contractors. Companies in advanced manufacturing, marine systems, sensors, communications, and weapons integration should assess their positioning for similar future programmes.
Defence growth deals for Scotland, Wales and Northern Ireland
The Budget introduces a new regional investment mechanism. A Defence Growth Deal is being developed for Scotland, adding to the 11,800 jobs already directly supported by Government defence spending in Scotland. Similar deals are confirmed for Wales (building on 3,900 existing defence jobs) and Northern Ireland (building on 900 existing defence jobs).
These complement the Defence Industrial Strategy's regional investment approach, which targets local strengths starting with Plymouth and South Yorkshire before extending to Scotland, Wales and Northern Ireland. The Budget converts this strategic intent into funded programmes.
Defence companies in devolved nations should engage with local authorities and development agencies to shape growth deal priorities. These deals will likely focus on leveraging existing regional strengths (shipbuilding in Scotland, advanced manufacturing in Wales, aerospace and cyber in Northern Ireland).
MOD efficiency reinvestment: unique flexibility
Significantly, the Ministry of Defence and Security Industry Authority have been provided with flexibility to reinvest savings and efficiencies targets to protect vital defence and national security outputs. This treatment distinguishes defence from most other departments required to return savings to the Treasury.
This flexibility enables the MOD to fund innovation and capability enhancements from efficiency gains rather than cutting programmes. This change will encourage innovation and incentivise the MOD and its suppliers to focus on delivering increased capability in innovative, cheaper ways.
Contractors proposing solutions that deliver both capability improvement and cost reduction may find a more receptive procurement environment.
Nuclear regulatory reform: civil-defence alignment
The Budget accepts the Fingleton report recommendations in principle and commits to radical nuclear regulatory reform. The Prime Minister established a Nuclear Regulatory Taskforce in February to propose radical reforms, treating this as a once-in-a-generation opportunity to regulate nuclear in a way that promotes better delivery without compromising safety.
Significantly, the Government is exploring consolidation of defence and civil nuclear regulatory functions, provided this is compatible with national security imperatives. The Government has committed to rapid implementation of these reforms.
Companies operating across civil and defence nuclear sectors could benefit from streamlined regulatory pathways. The implementation timeline creates a window for industry input into the new regulatory framework.
Strategic procurement reform: markets and demand management
The Government is reforming procurement to shape markets and manage demand, putting in place measures to identify, nurture and protect the UK's high-growth modern industrial strategy sectors like AI and foundational sectors like steel when procuring from the private sector. This approach extends to shipbuilding and maritime technology, as part of the action plan for shipbuilding and maritime technology due in Spring 2026.
This represents a fundamental shift from procurement as passive purchasing to active industrial policy tool, aligned with the Defence Industrial Strategy's commitment to favour UK-based suppliers where it strengthens national security and competitiveness.
Defence contractors should assess how their offerings align with identified IS-8 sectors (defence is one of eight) and prepare for procurement processes that explicitly weight UK economic benefit, supply chain resilience, and sovereign capability alongside traditional value-for-money criteria.
Innovation funding: £400 million annual UKDI budget
Whilst not new in the Budget, the funding framework confirms the UK defence innovation body receives at least £400 million annually, with the MOD spending at least 10% of its equipment budget on novel technologies like autonomy and artificial intelligence.
UKDI has "freedoms" to move fast, take sensible risks, stop or re-route projects, and back start-ups and small firms, operating more like a venture capital fund than a traditional government department.
Technology companies, particularly startups with dual-use capabilities in AI, autonomy, quantum, cyber, and advanced materials, should engage with UKDI's rapid procurement cycles. The three-speed procurement model includes a target of three-month cycles for rapid commercial exploitation of technology like drones and software.
What defence companies should do now
- Assess munitions/energetics positioning: with 13 factories planned and £1.5 billion committed, this represents the largest sovereign manufacturing expansion in decades. Companies with relevant capabilities should prepare for procurement opportunities in 2026.
- Engage with regional growth deals: Scotland, Wales and Northern Ireland deals are in development. Regional companies should connect with local authorities to influence priorities and position for opportunities.
- Review IS-8 alignment: strategic procurement will favour sectors identified in the Industrial Strategy. Assess how your offerings support defence, AI, clean energy, digital technologies, or other IS-8 sectors.
- Prepare for new procurement approaches: the shift to market-shaping procurement, three-speed acquisition cycles, and explicit UK economic benefit weighting requires different commercial strategies than traditional MOD procurement.
- Monitor nuclear regulatory reform: for dual-use nuclear companies, the implementation window offers opportunity to shape the new consolidated regulatory framework.
- Explore UKDI pathways: innovative companies should assess fit with UKDI's rapid procurement cycles and venture capital-style approach, particularly for AI, autonomy, and software-intensive capabilities.
Toby McCrindle, Partner and Head of Mishcon's Defence & Deeptech Sector Group, commented: "This Budget confirms the UK's commitment to defence as a core pillar of the UK's economic growth and security. The announcements this week, whilst not all new, underline the enormous shift in the UK's approach to defence and security in the last 12 months or so, reflecting the lessons learned in Ukraine and the new geo-politics. There are huge opportunities for smaller and high-growth companies alongside the prime contractors which in turn will, I hope, stimulate increased investment from venture capital and private sources of finance.”