Small businesses are facing crushing cost pressures and are holding back from taking on new staff, new research from the Federation of Small Businesses (FSB) has found.
As the new Chancellor’s first Budget looms, it will be his first big opportunity to prove that the “anti-entrepreneur era” is over, FSB said, amid continuing difficult trading conditions for small businesses and self-employed people.
FSB’s Small Business Index, a quarterly look at how small businesses are managing on a variety of measures, reveals a generally downbeat mood among the small business and self-employed community in the third quarter of 2026.
With small firms and self-employed people the only kind of business present in every postcode, the Chancellor will need to keep their priorities firmly in mind for the Budget if he truly plans to encourage growth across the whole of the UK.
Revenues low, costs high, jobs under pressure
In Q3, the percentage of small firms reporting that their revenues had fallen over the previous three months (53%) was once again far higher than the proportion of those reporting an increase in takings (23%), revealing widespread fragility in small firms’ finances.
Looking ahead, small firms themselves predict that this financial fragility will persist into the next three months, with nearly half (47%) forecasting that their revenues will shrink, and only around a fifth (22%) confident that their takings will see an uptick.
Cost pressures continue to weigh heavily on small firms, with nine in ten (89%) saying their costs had risen compared with the same period last year. A third (33%) of small businesses said their costs had increased by more than 10%.
Taxation was the most-cited driver of cost pressures, mentioned by over half (55%) of small firms whose costs have risen – underlining the need for action at the Budget to ease the tax burden, through increases to the Small Business Rate Relief and VAT thresholds. Fuel was in second place (53%) while utility bills were in third (52%), following swingeing rises in pump prices and wholesale energy costs in the wake of the Iran conflict.
Labour costs were cited by half (50%) of small firms as a driver of cost pressures – linking the Employment Allowance to the minimum wage is a sensible step the Government should take, to make taking on new staff and retaining existing employees less of a daunting prospect for the small business community.
The report indicated that employment levels among small businesses suffered over the third quarter. Only one in 14 small firms (7%) increased their staff numbers over the past three months, while one in five (20%) had to cut their number of employees. Looking into the fourth quarter, only one in 16 small firms (6%) anticipates growing their payroll, while over one in six (18%) expects to have to reduce it.
Strong action at the Budget to support the small business and self-employed community is greatly needed. The Budget will shape small firms’ confidence in the new Government and test whether ministers are serious about winning back their trust.
FSB would like to see the Chancellor announce the following growth-promoting changes this Wednesday:
- Raise the Small Business Rate Relief threshold, after a decade-long freeze that has dragged more than 100,000 small firms into a punishing pre-profit tax.
- Increase the Employment Allowance and link it to the National Living Wage, so support with employer National Insurance keeps pace as wage costs rise and continues to cover at least the NICs of four full-time workers on the NLW. Without that protection, rising employment costs risk putting small firms off hiring, with young people and those with health challenges among those most likely to lose out. FSB is also calling for a Statutory Sick Pay rebate to be introduced to support small firms employing those with health conditions.
- Cut Business Asset Disposal Relief to 14 per cent, reversing the rise to 18 per cent and restoring the pre-April 2026 rate after higher capital gains taxes weakened incentives for entrepreneurs to expand and grow. The higher rate has already damaged growth intentions, making entrepreneurs less willing to expand, invest and take risks in growing their businesses.
- Remove the majority of the Renewables Obligation charge from small firms’ energy bills, as has already happened for households. In March of this year, fixed costs on business energy bills rose by 44% on average. On top of this, many businesses are paying far higher unit costs as a result of the conflict in the Middle East. Removing some of the policy costs from their bills would provide a measure of relief for small firms.
- Raise the VAT registration threshold to £100,000, keeping more sole traders and the smallest firms out of a tax that can swallow more than a working week a year in compliance. It also sees entrepreneurs deliberately restrict turnover to avoid being pulled into the VAT system.
FSB National Chair, Tina McKenzie, said: “The Chancellor has a chance to draw a line under the anti-entrepreneur era and show that backing small businesses to grow is once again a Government priority. The only way to get good growth in every postcode is through getting small businesses and self-employed people the support they need to thrive, as they are part of the economic fabric in every part of the UK.
“Our research lays it out all too clearly. Small businesses of all kinds are seeing their takings fall and their costs rise. This cannot continue.
“From the industrial estate to the nursery gate, small firms in every section of the economy are looking to the Budget for the breathing space the Prime Minister has rightly promised.
“Events well outside small firms’ control have battered their margins, and reduced their ability to provide jobs. Reversing this sorry situation should be the Government’s top priority.”
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