Small business confidence is cooling according to the latest findings from the Federation of Small Businesses (FSB).
The FSB Small Business Index (SBI) shows that FSB members appear more cautious about their prospects than in recent quarters. The overall SBI reading at +20 is a significant decrease from +38 in the second quarter of 2015 and a +41 reading a year ago.
The FSB said that the results reflect the impact of recent changes announced in the Summer Budget, notably increased taxes on dividends and steep increases in the National Living Wage.
John Allan, FSB national chairman, said: "The recent Budget left many small firms with real challenges to overcome in how they operate in future. Now they need reassurance from Government and policymakers; their confidence is crucial to driving the economy and job creation."
Lower levels of confidence are reflected in more firms reporting a fall in investment intentions this quarter, which have fallen from 26% a year ago to 22% this quarter. This is coupled with a surprising rise in spare capacity among businesses.
However, although the number of businesses expecting to grow has also cooled slightly, it remains positive. Nearly six in ten small businesses plan to grow in the next 12 months, down from 65% in the previous quarter.
Meanwhile, small businesses are likely to continue to create jobs, although at a slower rate than previously, and businesses are planning to increase wages at a rate of 2.6% next year.
Skills shortages remain a major issue for small firms alongside concerns about the domestic economy and increasing labour costs. On a positive note, productivity is up and access to finance has continued to improve.
John Allan said: "Confidence has cooled as businesses face a number of challenges. Changes to tax treatment on dividends will affect many small business owners with modest incomes, while small employers also face steep increases in the National Living Wage just as they are preparing to bear the cost of pensions auto-enrolment. The reaction to these changes is reflected in the evidence we present today, which shows confidence levels amongst members cooling markedly."