What does the rise in defence spending mean for UK manufacturing?

With plans to lift spending on defence and national security to 5% of GDP by 2035, including the core 3.5% defence budget, the government is signalling a clear intention to strengthen the sector. It marks the highest investment level in several decades and reflects the scale of support being directed toward defence and national security. It’s a substantial commitment that could open new avenues for UK manufacturers over the coming years. Dave Atkinson, UK Head of Manufacturing, SME & Mid Corporates at Lloyds, shares practical insights on how smaller manufacturers can successfully enter the defence supply chain.

We’re entering an age where defence is viewed not just as a security imperative but as an engine of economic growth. The government’s Modern Industrial Strategy has placed defence front and centre as one of eight key sectors, alongside digital technology, advanced manufacturing and financial services, that will fuel future prosperity.

A sector already delivering for defence

The defence industry already makes a substantial contribution to the UK economy. It supports over 272,000 jobs, with government estimates suggesting another 50,000 will be created by 2035. It has attracted £1.4bn in foreign direct investment since 2024, and defence exports hit a 40-year high of £20bn in 2025.

Large multinational contractors like BAE Systems and Rolls-Royce have always operated on a global stage, serving international demand. Now, with domestic demand ramping up significantly, these established players are well-positioned to benefit from both streams of work.

But what’s really interesting is that there are approximately 12,000 UK SMEs already working in defence and national security, and the potential for growth in this segment is enormous.

The SME opportunity

Currently, an estimated 70% of all contracts issued by the Ministry of Defence are fulfilled by businesses outside of London. That’s already a positive sign for the regional distribution of work. However, the proportion awarded directly to SMEs is only around 4%.

The government recognises this gap and has set explicit targets to increase SME involvement to £7.5bn annually by 2028. To support this, a newly-launched MOD SME support hub has been designed to help more small and medium UK firms to bid for and win more defence contracts directly, rather than only through larger contractors as intermediaries.

This matters because defence procurement involves more than just military hardware. Think about supply chain resilience and reshoring, bringing contracts that historically went to overseas businesses back to UK manufacturers. For SMEs looking to differentiate themselves and secure long-term, stable contracts, these represent significant opportunities.

A sector with needs across multiple manufacturing disciplines

When we talk about defence procurement, manufacturers might assume it’s all about sophisticated military equipment – fighter jets, submarines, weapons systems. The reality is more diverse, and that’s where the opportunity for a wider range of businesses lies.

There are 40,000 military homes due to be upgraded over the next ten years. That’s work for construction firms, suppliers of building materials, heating and ventilation specialists, and companies providing facilities management. Traditional SME construction firms could see significant growth from this programme alone.

The government has made its commitment clear. The question now is whether UK manufacturers, particularly SMEs, can mobilise effectively enough to capture their share of this historic investment… I’ve spent my career working with manufacturers across the UK, and I’ve seen time and again how capable, innovative businesses can seize new opportunities when they’re equipped with the right information, financing and support.
Dave Atkinson, UK Head of Manufacturing, SME & Mid Corporates, Lloyds

Then there’s technology and logistics. Modern defence isn’t just about hardware; it’s about digital systems, cybersecurity, data management, communications infrastructure and supply chain solutions. If your business operates in any of these areas, there may be defence applications you can consider.

Food supply, textiles for uniforms, maintenance services, training facilities, logistics – the list of goods and services the defence sector requires is remarkably broad. The anticipated Defence Investment Plan, expected to provide detailed guidance on procurement priorities, will help businesses understand where they might fit in.

Driving growth across UK manufacturing regions

One of the most compelling aspects of defence spending is its potential to drive regional economic growth. Around 70% of defence industry jobs are outside London and the South East, concentrated in regional manufacturing heartlands like the West Midlands, South West and North East.

With strong manufacturing traditions, these areas are well-placed to bid for emerging defence requirements that will generate more high-quality jobs within their local communities.

Defence sector roles tend to be highly skilled and well-paid compared to many other regional employers. Defence firms are also more likely to invest in their local economies, taking on apprentices and retraining workers from other industries. This creates a virtuous cycle: as the sector grows, it builds the skilled workforce it needs while providing meaningful opportunities for people in areas that need them most.

This regional dimension shouldn’t be underestimated. While national security is the primary driver of increased defence spending, the economic benefits could be transformative for communities across the country. That’s why, as someone who works with manufacturers nationwide, I’m particularly excited about what this could mean for businesses outside the traditional economic powerhouses of London and the South East.

Preparing to engage with defence opportunities

To tap into these opportunities, manufacturers need two fundamental things: capital and collaboration.

Defence contracts can, for some businesses, require significant upfront investment. You might need to achieve specific certifications, invest in new equipment, expand your workforce, or adapt your facilities to meet security requirements. For SMEs, these barriers to entry can seem daunting.

That’s why at Lloyds, we’re making £35bn of funding available to firms operating or investing in the UK in 2026 across all sectors, with £9.5bn aimed specifically at SMEs. We’re here to support companies entering or expanding in the defence space. We understand that these businesses need capital and patient partners who understand the sector’s unique characteristics.

But funding alone isn’t enough. The real challenge, and opportunity, lies in collaboration.

Getting ready to supply the defence sector

The defence procurement processes can seem complex, the requirements unclear, and the pathways to winning work difficult to navigate. Breaking down these barriers requires collaboration between industry, finance, government and academia.

Industry bodies and trade associations can help businesses understand requirements and make connections. Financial institutions like Lloyds can provide not just funding but also advice and signposting. Government agencies, including the new SME support hub, can demystify procurement processes and help businesses understand opportunities. And academic institutions can support innovation and skills development.

If you’re a manufacturer wondering whether defence work could be relevant to your business, don’t assume it’s out of reach. Look at your existing capabilities through the lens of defence needs. You might be surprised at the connections. Precision engineering work for automotive clients could be directly relevant to defence applications. Robust logistics systems developed for other sectors are exactly the kind of expertise defence supply chains need.

Network with businesses already working in the sector. Many will have navigated the journey from outside defence to winning their first contract, and their insights will be invaluable. Industry events and trade associations can facilitate these connections.

Consider what investments or adaptations you might need to make. This could include additional security clearances, different quality assurance processes, or new equipment and facilities. Understanding these requirements early helps you plan effectively.

And speak to your bank. If you’re a Lloyds customer, we can discuss both the financing and the broader strategic implications of moving into defence work.

Positioning for future defence opportunities

The government has made its commitment clear. The question now is whether UK manufacturers, particularly SMEs, can mobilise effectively enough to capture their share of this historic investment.

The opportunity is real, the targets are ambitious, and the support mechanisms are being put in place. Early movers often gain advantages that become difficult for later entrants to replicate.

I’ve spent my career working with manufacturers across the UK, and I’ve seen time and again how capable, innovative businesses can seize new opportunities when they’re equipped with the right information, financing and support.

Increased defence spending represents a significant opportunity. It’s up to us in industry and financial services to ensure that this commitment translates into real growth for UK manufacturers across the country – creating jobs, driving innovation, creating stronger, resilient regional economies.

The defence sector isn’t just about protecting our national security. It can build a stronger, more prosperous Britain. And manufacturers of all sizes can have a crucial role to play in making that happen.