Small businesses are preparing for what has been described as an “unprecedented cost crisis” in April, with more than a third warning they may close or reduce operations as higher expenses take effect.
The Federation of Small Businesses (FSB) has written to Rachel Reeves warning that the cumulative effect of rising energy bills, business rates, higher employment costs and changes to statutory sick pay is undermining economic growth.
An FSB survey found that 35 percent of small companies are planning to either close or reduce production in the coming year in response to rising energy tariffs, increases in the national living wage and higher dividend tax rates.
FSB policy and advocacy chair Tina McKenzie said the burden of new costs would directly impact companies' ability to invest. “Running a small business is about to get a lot more expensive,” he wrote. “Businesses cannot grow if profits are squeezed by government policy.”
The FSB estimates that an employer with nine employees paid on the National Living Wage will see an increase in annual employment costs of £25,850 between January and April 2026, an increase of 12.9 per cent.
It also calculates that a typical small shop or restaurant will see business rates rise from £4,790 to £5,590 this year, while changes to dividend tax, a common way of generating income for owner-managers, will cost an extra £578 a year on earnings of £50,000.
The removal of the lower earnings limit for statutory sick pay is expected to add further pressure. The FSB estimates the change will cost the nine-employee firm about £990 a year.
Jan Wiest, who runs Initially London, a retailer specializing in monogrammed products, said the sales improvement had been impacted by higher taxes and operating costs.
“January was good for us, but then the taxes started hitting,” he said. “You're trying to figure out how the money coming in will cover the expenses going out. It makes it harder to hire or invest because you're carrying this constant burden.”
Sarah Curtis, who operates a historic boatyard in Ipswich, said rising wages and utility bills were making recruitment more difficult.
“There are a lot of small increases, utilities, salaries, rates and they all add up,” he said. “Small businesses are very reluctant to take on any new people.”
The FSB argues that the combined effect of the costs increases the risk of reducing hiring and expansion plans at a time when policymakers want to boost economic growth.
While ministers have defended the measures needed to improve worker protections and fund public services, business leaders have warned that smaller companies, which often operate on thin margins and with limited access to affordable finance, are particularly exposed.
As April approaches, small employers say they face a stark choice: absorbing higher costs, raising prices or scaling back activity, each with potential consequences for jobs and local economies.
Amy Ingham
Amy is a newly qualified journalist specializing in business journalism with responsibility for news content at Business Matters, the UK's largest print and online source of current business news.