The idea of a tourist tax for London has returned at a fragile moment for the capital’s hospitality sector. With hotels already facing steep business rate rises from 2026, persistent wage inflation and a hospitality VAT rate that sits at 20%, an overnight levy has reignited concerns about competitiveness, fairness and timing.

New analysis suggests a charge on overnight visitors could raise more than £350m annually – far above earlier £240m estimates. Hoteliers caution that the structure, administration and reinvestment of the tax will determine whether it supports tourism or adds further strain.

Figures from Central London Forward (CLF), representing 12 inner boroughs, are based on a 3% room-rate charge across hotels and short-term lets. Central boroughs alone could generate £275m a year, with the rest of London contributing another £77m. Westminster – home to the capital’s largest hotel cluster – could raise over £95m, while Camden, Kensington and Chelsea, as well as Tower Hamlets, may each exceed £20m.

Momentum follows powers granted last year to Mayor Sadiq Khan to introduce an overnight levy. At the time, he said such a charge could “directly support the capital’s economy and help cement its reputation as a global tourism and business destination”.

Key questions remain unresolved, including whether revenue would be retained locally, pooled at City Hall, or split between the two. Adam Hug, chair of CLF and leader of Westminster City Council, has argued central boroughs should retain at least half of any revenue raised, citing the cost pressures associated with managing high visitor numbers.

A new levy on a strained sector

The policy debate comes against a backdrop of continued accommodation growth. There are currently 196 hotels across London either in planning, under construction or undergoing refurbishment, with the potential to deliver a further 29,500 rooms. Alongside this, short-term rental supply continues to rise, with Airbnb listings increasing by an average of 2% a year – spelling an estimated 1,249 additional units over the next five years.

In theory, this expansion strengthens the case for a levy that captures value from visitor growth. In practice, operators argue it coincides with a convergence of cost pressures that leave little room to absorb further charges.

For many operators, the real concern isn’t the levy itself but the pile-up of costs arriving all at once.

One of the clearest policy choices concerns how a levy would be structured. CLF has advocated for a percentage-based charge rather than a flat per-night fee, pointing to international examples including Berlin, Edinburgh and New York. From a commercial perspective, many operators agree in principle but stress that design alone will not determine impact.

According to Nadia Milligan, a commercial property partner at Keystone Law, the reaction among hotel owners has been mixed and highly segmented. “Luxury and ultra-luxury operators are generally less worried about whether their guests can afford the charge,” she says. “What concerns them far more is the additional administrative complexity the levy would introduce.”

“At that point, operators are forced into difficult decisions about whether to absorb costs or push them into room rates,” she adds. “That’s where the cumulative effect becomes material.”

“The mid-market, made up of independent hotels and focused services, tend to serve families and value-conscious travellers,” Milligan explains, “and their margins are already under pressure, and even modest increases can have an outsized effect on demand.”

Building on Milligan’s thoughts, Zoe Powell, director of travel and hospitality at Xeinadin, warns that layering an overnight levy on top of existing VAT risks making the UK less competitive internationally. “The UK already applies the highest hospitality VAT rate in Europe at 20%,” she says. “Germany, France and Spain are all at 10% or below. Adding another charge at a time when operators are trying to keep stays affordable is a real risk.”

Powell also highlights the domestic dimension, noting that any levy would raise prices for UK travellers and contribute to inflationary pressures at home.

In light of this, industry bodies have responded forcefully. UKHospitality chair, Kate Nicholls, says that implementing a holiday tax in London would mean “the government going back on its word”, and branded the idea “the wrong way to make policy and the fastest way to undermine investment”.

“It has blatantly disregarded the commitments it gave to the House of Commons just three months ago that it ‘had no plans’ to introduce this tax,” Nicholls says. “This is a shocking U-turn that will only make life more expensive for working people. It could cost the public up to £518m in additional tax when they travel in the UK and have knock-on impacts for the wider hospitality sector.”

Who really pays the price?

According to Nicholls, a London tourist levy would increase the rate of VAT to 27% for people who want to enjoy a holiday in the UK. This would in turn cement it as one of the highest tax rates for consumers in Europe. “Make no mistake,” Nicholls continues, “this cost will be passed directly onto consumers, drive inflation and undermine the government’s aim to reduce the cost of living.” 

While Nicholls is relieved by the chancellor’s pause on the levy’s consultation, she confirmed that the trade association will be “working hard with the chancellor’s team to highlight the damage this will do to the cost of living”.

Echoing those concerns, Gavin Taylor, chief executive of Clermont Hotel Group, says, “The UK already has one of Europe’s highest VAT rates, and I strongly believe that an overnight tourist levy would be a strategic mistake for London. At a macro level, it would drive prices higher, working against efforts to control inflation and placing further pressure on consumers.

“The hospitality sector wants to invest, grow and create jobs, but policies like this make that increasingly hard to justify. Despite attempts to engage, the government has not meaningfully consulted with our sector on this matter, which also makes it incredibly difficult for hospitality businesses to plan ahead and assess its potential impact.”

Though sitting firmly in the ‘do not implement’ camp, Taylor concedes that if a levy is pursued, it must avoid a one-size-fits-all approach and be “tightly ring-fenced for initiatives that genuinely drive additional demand for London”.

Investment promise or administrative burden?

The levy debate extends well beyond hotels. Wesley Brown, chief operating officer at Pass the Keys, says visitor taxes can also distort behaviour in less visible ways. “In cities like Edinburgh and Glasgow, local managers are already caught between absorbing the cost or risking fewer bookings,” he explains. “A 5% increase can be the difference between being competitive or not.”

Brown also warns that some hosts may shift away from short-term letting altogether to avoid cumulative costs.

For many hoteliers, the biggest concern is not the principle of a levy, but how it would work in practice. “There’s real anxiety that revenue will simply be absorbed into general taxation rather than reinvested in visitor economies,” Milligan says. “That would be a logistical nightmare,” she adds, referring to the risk of borough-level variation.

If the tax simply feeds general coffers rather than tourism, hotels fear they’ll shoulder the cost without seeing the benefit.

Stuart Houston, finance director at RBH Management, says headline revenue projections obscure operational realities. “CoStar forecasts around 3% annual room revenue growth for Upper Midscale London hotels over the next four years,” he says. “If a levy comes in at 3-5%, that effectively consumes all projected growth before you even account for National Insurance, wage increases or business rates. Without alignment between PMSs, OTAs and third-party distributors, hotels risk manual reconciliation, collection errors and even paying commission on the tax itself.”

Ruth Whitehead, COO of hospitality technology provider Eviivo, also agrees clarity will be critical. “Guests need to understand upfront what they’re being charged and why,” she says. “If that transparency isn’t there at the booking stage, trust is lost.”

For Fergus Stewart, chief executive and general manager of The Landmark London, the issue ultimately comes down to timing and cumulative burden. “Our business is facing a year-on-year increase in business rates of around £1m,” he says. “Add National Insurance, wage rises and some of the highest food and transport costs in Europe, and something has to give.”

Stewart describes the prospect of a tourist levy as “particularly ill-timed”, warning that further taxes risk undermining London’s global competitiveness at a moment when international travellers have abundant alternatives.

Academic research suggests small levies may not deter travel immediately, but perception matters over time. Cindy Heo, associate professor of revenue management at EHL Hospitality Business School, notes, “Research shows accommodation demand tends to be relatively inelastic in the short term. Repeated exposure to extra charges can reinforce the idea of a destination being expensive.”

Even modest charges can reshape traveller behaviour when layered onto already rising prices.

While London is not alone in exploring visitor levies, its circumstances are distinct: a fragmented local authority structure, high VAT environment and an industry already absorbing unprecedented cost increases.

The question is not whether London can introduce a tourist tax, but whether it can do so in a way that supports long-term tourism growth without destabilising the businesses that sustain it.

Perhaps the real issue isn’t even a tourist tax in itself, but rather how many costs – be it increases or whole new expenses – are being introduced in a short period of time. The general manager of The Landmark London hopes the government can “reconsider these cumulative burdens to ensure London remains a vibrant, affordable, and world-class destination”. 

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