Small businesses are facing a tough start to 2026 as confidence slumps and growth plans stay out of reach, new research by the Federation of Small Businesses (FSB) reveals.
The Small Business Index (SBI) plunged to -71 in the final quarter of 2025, meaning far more businesses were struggling than succeeding. This is down from -58 in Q3 and the lowest it’s been since the outbreak of Covid in 2020, when it dropped to -143.
The hospitality accommodation and food sector is the worst hit, recording a confidence score of –104 – with 46 per cent of those small firms planning to decrease staff between January and March 2026, and 58 per cent expecting a decrease in revenues.
The Government promised to deliver its promised 40 per cent retail, hospitality and leisure reduction, using the full powers it took from the reduced retail, hospitality and leisure multiplier.
Small firms with staff are bearing the brunt – with those employing between 1-9 people recording a dire confidence score of -85.
Across all other small firms, taxation is the number one cost pressure, cited by a record 64 per cent of respondents, up from 62 per cent last quarter.
Tax first topped the list in Q2 2025 – the first time this has happened in the SBI’s history – and has stayed there ever since, showing how policy decisions are now landing directly on small business growth plans, with dividend tax rises still to come.
Comparatively, in this quarter’s survey, labour costs worried 56 per cent of businesses and utilities concerned 47 per cent.
With revenues falling and costs rising, investment plans have inevitably stalled, with 37 per cent planning to reduce investment levels next quarter, compared to just 13 per cent planning to increase.
Meanwhile, 26 per cent of small businesses reduced their workforce in Q4, five times as many as increased it. Looking ahead, expectations for the next quarter are similarly bleak, with 23 per cent of firms planning to cut staff in the coming quarter.
These reductions are most pronounced in businesses with 10 to 49 employees, where 51 per cent reduced headcount in the last quarter.
To mitigate these issues, FSB is calling for:
- The Government has the legal powers to deliver a 20p reduction to the Retail, Hospitality and Leisure (RHL) multiplier, so it must use these powers in full, going beyond the paltry 5p discounts announced at the Budget
- Standing charges on small firms’ energy bills to be reduced to prevent an energy bills time bomb hitting small businesses – these are set to rise in April
- A Statutory Sick Pay (SSP) small business rebate – with SSP becoming a day one right under the Employment Rights Act, and estimates that sick pay is set to double, a rebate will allow more small firms to hire without financial pressures
- The Employment Allowance to be raised by 4.1% to £10,930 – in line with the National Living Wage (NLW).
Tina McKenzie, Policy Chair of the Federation of Small Businesses, said:
“The human cost of these numbers is devastating. Small business owners who have spent years building something stable are now being forced to make painful decisions, putting growth on hold simply to stay afloat.
“When a record 64 per cent of firms say taxation is their biggest cost pressure, higher than labour or energy, it points to a system that is making employment and investment increasingly difficult to sustain. They’re being squeezed by policy choices that have made growth unaffordable.
“What’s particularly alarming is that businesses with staff are being hit the hardest. The very firms that create jobs, train people and drive local economies are seeing their confidence crater to -85 – that’s not sustainable and is why we’re seeing so many firms reducing headcount.
“There are clear steps that would help alleviate some of these issues – an urgent rethink on business rates, addressing the soaring standing charges for energy, raising the Employment Allowance and introducing an SSP rebate. We need to see urgent action on these in the Spring Forecast and the upcoming King’s Speech.
“Small businesses always show remarkable resilience in times like these, adapting time and time again in the face of sustained pressure, but resilience alone cannot offset policies that keep pushing costs higher.”