The Federation of Small Businesses (FSB) reports that small UK companies are expected to shrink and sell or close more than expected growth over the next 12 months, a worrying signal to the wider economy.
According to FSB’s second-quarter Small Business Index (SBI), 27% of small businesses expect contracts, closures or sales in the coming year, surpassing the planned growth of 25%. This marks the first time since the index began that balance has tilted towards pessimism.
In sharp contrast, the first quarter of 2025 has drawn a more optimistic picture. At that time, nearly half (48%) of small businesses are expected to grow, with only 18% contracting or ending. Now, nearly half of respondents (49%) said they expect to stay on the same scale – 34% previously, with obvious stalls in ambitions and activities.
These findings are at a critical moment when the government is ready to release its long-standing small business strategy. Industry leaders urged ministers to ensure that the strategy provides specific measures to increase growth and remove barriers to serious attention to 5.5 million small companies in the UK.
Overall confidence among business owners continued to decline, with the title confidence index falling to -44 points in the second quarter, down from -41 in the first quarter to -44 points. The report attributes much of the depression to the increasing financial pressure on employer state insurance contributions and increased national housing wages in April. Anxiety is also growing around the proposed Bill of Rights of Employment, which is expected to bring further obligations and potential costs to small employers.
More than one in five (42%) small businesses expect their revenue to decline in the third quarter, while only 27% of revenue forecasts will increase. The recruitment sentiment is still just as gentle. The number was reduced twice (9%) in the second quarter (20%). A similar model is expected to be expected over the next three months, with 19% planned to lay off employees and only 8% hope to expand their teams.
When asked to identify the biggest growth barrier, most small companies (64%) listed struggling domestic economies. The tax burden is 39% and labor costs lag behind 37%, two directly related to recent policy changes, including employer tax rate hikes.
FSB Policy Chairman Tina McKenzie warned that the report’s findings should serve as a wake-up call for the government.
“This is the first time in the history of the small business index, where more companies are predicting contraction rather than expansion. This should sound an alarm at the heart of the government,” she said.
“Confidence is not only low – it stagnates. It is a serious threat to the UK economy. If small businesses form the backbone of our economy, which constitutes a decline for the sake of a decline, then growth at the national level is jeopardized. The upcoming small business strategy must be bold, targeted, targeted and urgent.”
She also points to two areas of emergency action: a late payment culture, especially late payments from large companies, and the use of personal guarantees in small business loans – what she calls “a huge growth brake.”
In the proposed employment rights bill, McKenzie said she was concerned that it would prevent job creation.
“It’s no surprise that the Employment Rights Act will add £5 billion in additional costs per year. Nine out of 10 small companies are concerned. Extending one-day unfair dismissal will make it more risky to accept new employees, especially those who may be detrimental to the labour market, which is detrimental to businesses. It’s detrimental to social mobility.”
As small companies feel squeezed in every way, the government’s next step will be crucial, just to reverse the recession of confidence, but to prevent a significant contraction in UK entrepreneur bases.
