There is no doubt that small and medium-sized enterprises (SMEs) are the backbone of the UK economy. Accounting for 99% of all businesses, SMEs play an important role in driving sustainable growth, creating jobs and strengthening communities across the country.
But despite the important role they play, growth is a major challenge for many of these entities as they are buffeted by choppy political and economic headwinds. The biggest growth blockers include uncertain trading conditions and wage inflation, as well as labour shortages and supply-chain pressures, according to a recent survey by the Association of Practising Accountants (APA).
Last year’s Budget still bears some blame for increasing the cost of doing business, with rises in the National Living Wage (NLW), National Minimum Wage (NMW), and employers’ National Insurance Contributions. Since then, the government has been making progress on its Employment Rights Bill that may increase costs further, and the 2025 Autumn Budget announced even more measures that will make growth difficult for some SMEs.
All these factors have the potential to hinder long-term growth for SMEs, so business owners need to take action to build resilience and adapt to the ever-changing business landscape.
Tackling concerns about trading conditions
According to the APA, uncertain trading conditions pose the biggest challenge to SMEs in the current economic climate. This may not come as a surprise, as tariff negotiations and shifting regulatory landscapes continue to disrupt global trade.
There has been progress here over the course of the last year, with the UK securing a new trade deal with India, and it managed to avoid the brunt of the trade tariffs introduced by the US, agreeing a trade deal which has been welcomed by SMEs – despite it being limited in scope. The same applies to agreements to reset the UK-EU relationship – the government has taken the first important steps, but it remains unclear how far and how fast the reset will advance. This leaves a level of uncertainty for SMEs, threatening export margins, input costs and growth planning.
As we await clarity, SMEs across the UK can take measures to increase their resilience and adapt their financial strategies. This could include diversifying their export markets, managing currency risks, strengthening supply chains and closely monitoring global tax changes.
What’s more, trade digitalisation offers a huge opportunity, with the World Trade Organisation estimating that AI could boost the value of global trade by nearly 40% by 2040. Instead of focusing just on physical expansion, SMEs should also turn their attention to warehouse management and automation, as well as digital, cloud-based delivery models that can reduce the cost and increase the scale of exporting opportunities, whatever the outcome of the ongoing trade deals.
Managing the biggest line of expenditure
Wages are often the biggest outgoing for a business, and with annual rises to the NMW and NLW looming in April, SMEs are concerned about the challenges this will bring. For SMEs employing five full-time workers at NLW, the increases announced in the Autumn Budget add roughly £4,800 a year to their wage bill.
Businesses will always need to employ team members – they cannot function without them, especially SMEs that are trying to scale up and expand operations. So to accommodate this, there is a need for flexibility and cost-cutting in other budgets to allow businesses to adapt when these wage increases inevitably come around.
For example, are suppliers still offering competitive pricing or do you need to switch to a cheaper alternative? Is your stock management optimised to minimise waste? Could you switch to cheaper, more sustainable solutions in your supply chain?
Embracing technology and digitisation can also help to save costs, leading to healthier reserves for wage increases. There is scope to lean into AI to maximise efficiency, free up the time of team members and even analyse customer sales data at a much quicker rate. Care must be taken to strike the right balance, as too much automation can risk poor customer service and threaten growth prospects even more than rising wage costs do.
The road ahead
It’s clear that the journey towards business growth remains a turbulent one for SMEs – and the outcomes of last year’s Autumn Budget could cause even more trouble on the horizon.
In addition to NMW and NLW increases, the Budget also announced pension-related changes. National Insurance relief on salary sacrifice pension contributions will be capped at £2,000 per year from April 2029, meaning contributions above that level will attract employer and employee National Insurance. What’s more, business rates reform from April could hinder growth for some SMEs. While the rates are set to fall for smaller, customer-facing businesses, those with larger offices, warehouses and big retail sites will pay more.
In response to its survey findings, the APA has called on the government to provide further support to SMEs, putting them at the heart of the pro-business agenda that is core to its recently launched Industrial Strategy. This includes identifying a series of short-term, stop gap measures to reduce the immediate challenges SMEs are facing, including revisiting rises in corporation tax and National Insurance, and incentivising capital investment. It is also encouraging the government to take a more realistic view of future trading relations with Europe.
Time will tell how the government will respond to these concerns, but in the meantime SMEs can get ahead by ensuring they are in the best financial position to adapt to any challenges thrown their way.
Duncan & Toplis offers business services to SMEs across a range of sectors, providing tailored business advice and services to help achieve business goals. To find out more, visit www.duncantoplis.co.uk.