New research by the Federation of Small Businesses has found that the proportion of small firms expecting to contract, sell or close in the next year outnumbers the percentage that are hoping to grow.
For the first time in the history of the Small Business Index, published every quarter by the Federation of Small Businesses (FSB), the proportion of small firms bracing for contraction, sale or closure is greater than those expecting to grow.
The share of small businesses, surveyed in June, who said they expected their business to shrink, close or be sold over the next 12 months is 27%, compared to 25% who said their business will expand.
This represents a significant shift in sentiment among the UK’s small business owners. In the first quarter of 2025, nearly half of small businesses (48%) expected to grow over the coming year, while only 18% were bracing for contraction, sale or closure. The percentage of small firms predicting that they would remain around the same size has risen from 34% in Q1 to nearly half in Q2 (49%).
"For the first time in the history of the Small Business Index, more small businesses are predicting they will shrink than expand, meaning that as a country we are potentially facing a very dangerous situation. Confidence being so low, and not showing any improvement since the start of the year, is bad enough. But add in the fact that stagnation and pessimism among small businesses spells huge risk for the overall economy, and the upcoming Small Business Strategy needs to be ambitious enough to meet the scale of the challenge facing the UK’s small firms." Tina McKenzie, FSB policy chair.
The FSB has described the findings as "unprecedented" and says it underlines the "urgent need" for the government’s forthcoming Small Business Strategy to take decisive action to help small firms grow.
Confidence drops among small business owners
The survey of 1,400 small business owners has also found that confidence levels have slipped further since the start of the year, and are still deeply in negative territory. The headline confidence measure dropped to -44 points, down from -41 points in the first quarter of this year.
The FSB says that the gloomy finding "likely reflects small business sentiment around the introduction of higher levels of employer National Insurance contributions and rises in the National Living Wage, which came in at the start of Q2 in April, as well as fears around the impending Employment Rights Bill, which looks set to impose a new raft of costs and risks onto the shoulders of small employers".
The pessimistic outlook was reflected in small businesses’ predictions for their revenues over the next three months, with 42% predicting they would decrease, and only 27% looking forward to higher revenues over the third quarter.
Twice as many small businesses shed staff over Q2 (20%) than increased their employee numbers (9%), with similar numbers predicted for the next three months (19% and 8% respectively).
Employer National Insurance rise hits home
In terms of factors which will constrain their growth over the next year, small business owners overwhelmingly pointed to the domestic economy, selected as a top-three concern by 64% of small businesses. The tax burden was in second place, at 39%, closely followed by labour costs, at 37% - both likely in large part in response to the hike in employer National Insurance contributions.
Tina McKenzie, FSB policy chair, said: "The government has made all the right noises about supporting the small business community. Now is the time for ministers to make good on their promises, and to use the Small Business Strategy to tackle issues like late payments by big businesses to their smaller suppliers, and the blanket imposition of personal guarantees on small business loans, both of which are enormous brakes on growth among small firms.
"Meanwhile, the Employment Rights Bill is also a massive dampener on small firms’ appetite to take on staff. The Bill is set to load a staggering £5 billion in costs per year onto employers, so it’s no surprise that nine out of ten small employers are seriously concerned … With no significant changes as yet to the proposals, especially to the policy of expanding day one unfair dismissal rights, the Bill will act as a thumb on the scales against taking on a new employee."
Written by Rachel Miller.