Small businesses across the UK are bracing for a significant financial squeeze in April, with over a third contemplating output cuts or outright closure as a confluence of rising costs takes hold. The warnings, issued by the Federation of Small Businesses (FSB), highlight an “unprecedented cost crunch” driven by increases in energy bills, business rates, employment costs, and changes to statutory sick pay.
The FSB has directly communicated its concerns to Shadow Chancellor Rachel Reeves, outlining the potential for these cumulative pressures to undermine economic growth. A recent survey conducted by the organization revealed that 35 per cent of small firms are actively considering reducing operations or shutting down entirely in response to the escalating financial burden.
The impending increases are multifaceted. Employers with nine staff members earning the national living wage will see annual employment costs jump by £25,850 between January and April 2026 – a substantial 12.9 per cent increase, according to FSB estimates. A typical small shop or restaurant faces a rise in business rates from £4,790 to £5,590 this year. Changes to dividend tax, a common income source for owner-managers, are projected to add an additional £578 annually on earnings of £50,000.
The removal of the lower earnings limit for statutory sick pay is expected to exacerbate the situation, adding approximately £990 annually to the costs for a nine-employee firm. These combined pressures are creating a particularly challenging environment for small businesses, which often operate with tighter margins than larger corporations.
Jane Wiest, owner of Initially London, a retailer specializing in monogrammed products, exemplifies the challenges faced by many. Despite a strong January, she noted that recent tax increases are overshadowing sales improvements. “You’re trying to work out how the money coming in will cover the expenses going out,” she said, highlighting the precarious balancing act many small business owners are now navigating.
The concerns extend beyond individual businesses. Brokers specializing in SME finance are reporting growing anxiety among their clients, with 58 per cent citing increased running costs as the biggest worry – a significant increase from 48 per cent in the third quarter of 2025. The upcoming minimum wage increase is a major concern for 33 per cent of brokers, followed by dividend tax rate increases and business rates reform.
Demand for finance is also on the rise, with 74 per cent of brokers anticipating an increase in SME borrowing over the next six months, up from 66 per cent in the previous quarter. Iwoca’s SME lending thermometer, which measures lending conditions, rose to 5.98 in the fourth quarter of 2025, from 5.15 in the third quarter, indicating a growing need for capital.
Giovanni Contratti, director of the broker channel at Iwoca, emphasized the impact of government-mandated cost increases. “Small businesses are clearly feeling the pressure of rising costs, and the further Government-mandated cost increases in April will add to that burden,” he stated. “Demand for finance is growing as businesses look to invest and continue growing.”
The situation is not solely attributable to recent policy changes. A report by the House of Commons Business and Trade Committee revealed that small firms are grappling with cumulative pressures comparable to those experienced during the pandemic. The committee found that SMEs are currently owed £112 billion in unpaid invoices, leading to an estimated 38 small supplier closures each day due to late payment practices.
Lingering high energy prices – nearly double their levels from three years ago – and increasing retail crime, estimated to cost businesses £4.2 billion annually, are further compounding the difficulties. Innovation and export activity among SMEs have also declined, falling to a four-year low, according to the latest State of Small Business Britain report from the Enterprise Research Centre.
Despite a record number of working-age adults – 36 per cent – planning to start a business, the proportion of SMEs reporting product innovation has decreased from 30.4 per cent in 2021 to 24.1 per cent in 2024. Stephen Roper, director of the Enterprise Research Centre, noted a “worrying decline in innovation and exporting,” despite the UK’s traditionally resilient entrepreneurial culture.
The retail sector is particularly vulnerable. According to research from the British Retail Consortium (BRC), 61 per cent of retail finance chiefs are planning to reduce staff hours and overtime, while 45 per cent anticipate freezing recruitment due to concerns about rising employment costs and new workers’ rights. This suggests a potential slowdown in hiring and a contraction in the retail workforce.
The confluence of these factors paints a concerning picture for the UK’s small business sector, raising questions about its ability to navigate the challenges ahead and contribute to sustained economic growth. The April cost increases represent a critical juncture, potentially forcing difficult decisions for many firms and impacting the broader economy.
