UK Small Businesses Face Growing Economic Squeeze

Government Policies Risk Locking Out Vital Growth Engines

A new analysis reveals that UK government spending plans, while aiming to stimulate economic growth, are increasingly out of step with the realities faced by small businesses and sole traders, potentially hindering overall GDP expansion.

Rising Costs and Limited Relief

Micro-enterprises and sole traders, which already contribute significantly to the UK economy – accounting for 60% of private-sector employment and over half of total business turnover – are struggling under the weight of rising costs. Recent budget increases to employer National Insurance (NI) contributions and minimum wage hikes have not been matched with corresponding support measures.

A recent survey by the British Chambers of Commerce found that 82% of businesses anticipate the NI increase will negatively impact their operations. Over half predict effects on recruitment, pricing, and day-to-day activities.

Researchers have observed that government support schemes often fail to reach those who need them most. Their research into informal work highlights that many micro-businesses (ten employees or fewer) operate in a regulatory environment that feels misaligned with their economic realities.

The Rise of Informality

Many micro-businesses operate on thin margins, making formal compliance with tax, labor, and reporting obligations challenging. This isn’t a matter of unwillingness, but a lack of resources – both manpower and time – to navigate complex systems. According to the Federation of Small Businesses, nearly a quarter of small firms report spending over 10 hours per month on administrative tasks related to tax compliance.

When formalization becomes unviable, the government loses potential tax revenue and opportunities for economic growth. Researchers found that business owners don’t necessarily reject regulation, but rather complex systems that don’t offer security. When the risks of formal recognition outweigh the benefits, operating informally becomes a rational choice.

Informal work is a global issue. The International Labour Organization’s 2025 report indicates that approximately one in ten workers in high-income countries like the UK are informally employed, with over 60% working within formal enterprises as undeclared workers.

Structural Barriers to Growth

Regulatory structures in the UK can exacerbate these challenges. While the recent increase in the VAT threshold to £90,000 may seem helpful, it can discourage growth by creating a disincentive to exceed that limit. The International Monetary Fund has shown that firms often intentionally limit turnover to avoid VAT registration.

Evidence suggests a measurable slowdown in growth as firms approach the threshold, with no rebound after registration. Approximately one in five firms actively avoids VAT registration by declining work or restructuring operations, signaling that the system discourages formal expansion.

Beyond taxation, eligibility criteria and administrative burdens often exclude small firms from even well-designed support schemes. The Help to Grow: Management programme, while valuable, is limited to businesses with five or more employees, excluding many sole traders and early-stage entrepreneurs.

Similarly, Apprenticeship policy often feels inaccessible to micro-businesses due to funding rules and administrative complexities. Recent changes to Level 7 apprenticeship funding rules, including age restrictions, raise concerns about continued investment in leadership development.

To truly support small businesses, the government must move beyond broad tax adjustments and focus on tailored support that recognizes the complexities of informality and builds trust. This includes simplifying support mechanisms, offering incentives for growth, and ensuring access to skills programs for businesses of all sizes.

Without these changes, the UK risks deepening its two-tiered economy, where formality becomes a privilege rather than a pathway to success. Including those already contributing to the economy, even if they are not yet formally recognized, is crucial for building a fairer and more dynamic business environment.