UK small business confidence has fallen sharply in Q3 2025, with nearly 33% of firms expecting to downsize, sell, or close next year due to rising taxes, weak growth, and high employment costs. Only 18% anticipate expansion, signaling a potential economic downturn.
-
Nearly 33% of UK small businesses plan to downsize, sell, or shut down in 2026 amid tax hikes and weak growth.
-
Business confidence index hit a low of minus 74 in September 2025, driven by soaring labor costs and inflation pressures.
-
Over 40% of homebuilders expect housing starts to decline through Q4 2025, with insolvencies matching 2023’s three-decade high of voluntary liquidations.
UK small business confidence plummets in Q3 2025 amid tax fears and rising costs. Discover key survey insights, expert warnings, and economic impacts on growth and housing. Stay informed on budget implications—read now for vital updates.
What is the current state of UK small business confidence in 2025?
UK small business confidence has tumbled significantly in the third quarter of 2025, according to a survey by the Federation of Small Businesses. Nearly 33% of small companies expect to downsize, sell, or shut down next year, while only 18% foresee expansion. This gloomy outlook stems from weak economic growth, impending tax increases, and escalating employment costs, potentially leading to reduced spending and investment ahead of the November budget.
How are rising taxes and costs impacting UK business leaders?
The Federation of Small Businesses attributes the decline in UK small business confidence to a mix of high taxation and rising employment expenses, with insolvencies in the first nine months of 2025 roughly equaling the 2023 peak—a three-decade high mostly from voluntary liquidations. Tina McKenzie, policy chair at the Federation of Small Businesses, warns that widespread business shrinkage could trigger a vicious cycle of lower tax revenues, higher unemployment, and increased state demands. The Institute of Directors’ September survey of 1,500 business owners revealed a confidence index score of minus 74, the lowest in recent months, exacerbated by record-high cost expectations, particularly in wages, where 83% of leaders cited labor costs as the primary concern. Anna Leach, chief economist at the Institute of Directors, highlighted that conditions worsened across all sectors, urging Chancellor Rachel Reeves to deliver a pro-growth budget on November 26 to prioritize businesses and counter the slipping outlook.
Frequently Asked Questions
What factors are driving the decline in UK small business confidence for 2026?
The drop in UK small business confidence is mainly due to upcoming tax increases, weak growth, and high employment costs, as per the Federation of Small Businesses survey. Nearly 33% of firms plan to downsize or close, while rising wage pressures and inflation add to financial strains, with insolvencies remaining high from voluntary closures under ongoing economic pressure.
Will inflation pressures persist in the UK economy through 2026?
Yes, the Bank of England warns that inflation may cool more gradually than expected, potentially lasting into 2026 due to food price pressures and persistent shocks. Deputy Governor Clare Lombardelli advises against assuming quick fades in inflation, though MPC member Sarah Breeden sees no signs of weakened disinflationary momentum, while Catherine Mann notes a possible persistence scenario despite opportunities for rate cuts.
Key Takeaways
- Falling UK small business confidence: Surveys show a sharp Q3 2025 decline, with 33% of firms eyeing downsizing amid tax and cost hikes, threatening broader economic stability.
- Housing sector delays: Over 40% of developers, per Knight Frank’s survey of 60 homebuilders, expect fewer starts through Q4 2025 due to budget uncertainties around taxation.
- Pro-growth budget needed: Experts like Anna Leach call for supportive policies to boost investment and counter labor cost rises, avoiding a downward spiral in employment and revenues.
Conclusion
The erosion of UK small business confidence in 2025 underscores mounting pressures from tax ambiguities, inflation persistence, and soaring costs, as evidenced by key surveys from the Federation of Small Businesses and Institute of Directors. With homebuilding stalled and insolvencies elevated, the November 26 budget presents a critical opportunity for pro-growth measures to stabilize the economy. Businesses and policymakers must act decisively to foster expansion and mitigate risks heading into 2026.
The IoD reported a score of minus 74 on its business confidence index for September
According to a survey of approximately 1,500 business owners, the picture remains bleak, with insolvencies in the first nine months of 2025 roughly matching those of 2023, which reached a three-decade high. The majority of insolvencies were voluntary liquidations; however, this indicates that many small businesses are opting to close due to ongoing financial pressure.
It is not just entrepreneurs who are preparing to bear an even heavier tax burden. The whole working population faces this risk. When asked about the possibility of higher taxes, Prime Minister Keir Starmer did not rule out a rise in income tax, an increase in national insurance contributions, or even a rise in VAT level, all of which indicate that the government may have to revisit its manifesto commitments on balancing the books.
In September, business executives had warned of a decline in confidence across the business sector. Anna Leach, the chief economist at the Institute of Directors (IoD), noted: “Business confidence has plumbed new depths in September, following a fleeting improvement at the tag-end of summer. Conditions worsened across the board, with cost expectations hitting a record high, driven notably by employment costs.”
At the time, she appealed to Chancellor Rachel Reeves to deliver a pro-growth budget in November that prioritizes businesses. The IoD’s analysis showed that for the month, the main reason for the slipping outlook was increasingly rising wage costs. An overwhelming 83% of business leaders attribute the decline in confidence to the rise in labour costs. Overall, the industry group reported a September reading of minus 74 on its business confidence index.
The BoE had warned that high inflation may persist in the coming months
The Bank of England had stated that the cooling of inflation could be more gradual than expected and persist well into 2026, primarily due to food price pressures. Clare Lombardelli, the Bank’s deputy governor, warned that policymakers should not think inflation shocks will fade quickly.
Although inflation is still high, Catherine Mann, a member of the monetary policy committee (MPC), believes there’s still a chance for more rate cuts. She remarked that “an inflation persistence scenario is playing out.” However, she voted against the BoE’s interest rate cut in August.
Nonetheless, MPC member Sarah Breeden anticipates that it’s unlikely the current inflationary pressures will continue into 2026. She added that there was no reason to believe that the disinflationary momentum from earlier price shocks had weakened.
