For the first time in its history, the Federation of Small Businesses (FSB) has reported that more UK small firms expect to shrink, sell up or shut down over the next 12 months than anticipate growth—a worrying signal for the wider economy.
According to the FSB’s Q2 Small Business Index (SBI), 27 per cent of small businesses expect to contract, close or be sold in the coming year, outstripping the 25 per cent who are planning for growth. It marks the first time the balance has tipped towards pessimism since the index began.
In stark contrast, the first quarter of 2025 painted a far more optimistic picture. Back then, almost half (48 per cent) of small businesses expected to grow, with just 18 per cent bracing for contraction or closure. Now, nearly half of all respondents (49 per cent) say they expect to remain the same size—up from 34 per cent previously—suggesting a marked stall in ambition and activity.
The findings come at a pivotal moment as the Government prepares to publish its long-awaited Small Business Strategy. Industry leaders are urging ministers to ensure the strategy delivers concrete measures to boost growth and remove obstacles that are weighing heavily on the UK’s 5.5 million small firms.
Overall confidence among business owners has continued its downward slide, with the headline confidence index dropping to -44 points in Q2, down from -41 in Q1. The report attributes much of the gloom to mounting financial pressure from April’s rise in employer National Insurance contributions and the increased National Living Wage. Anxiety is also growing around the proposed Employment Rights Bill, which is expected to introduce further obligations and potential costs for small employers.
More than two in five (42 per cent) small businesses expect their revenues to decline in Q3, while just 27 per cent forecast a boost. Hiring sentiment remains equally subdued. Twice as many firms reduced their headcount in Q2 (20 per cent) than increased it (9 per cent). A similar pattern is forecast for the next three months, with 19 per cent planning job cuts and only 8 per cent looking to expand their teams.
When asked to identify the biggest barriers to growth, the majority (64 per cent) of small firms cited the struggling domestic economy. The tax burden followed at 39 per cent, with labour costs close behind at 37 per cent—both directly linked to recent policy changes, including employer tax hikes.
Tina McKenzie, Policy Chair at the FSB, warned that the report’s findings should serve as a wake-up call to Government.
“For the first time in the history of the Small Business Index, more firms are predicting contraction than expansion. That should ring alarm bells at the heart of Government,” she said.
“Confidence is not just low—it’s stagnant. That’s a serious threat to the UK economy. If small businesses, which make up the backbone of our economy, are bracing for decline, then growth on a national level is in jeopardy. The upcoming Small Business Strategy must be bold, targeted and urgent.”
She also pointed to two urgent areas for action: late payment culture, particularly from big corporates, and the use of personal guarantees in small business lending—both of which she described as “enormous brakes on growth.”
On the proposed Employment Rights Bill, McKenzie expressed concern that it would deter job creation.
“The Employment Rights Bill will add £5 billion in extra costs per year onto employers. It’s no surprise that nine out of ten small firms are worried. The extension of day-one unfair dismissal rights will make it even riskier to take on new employees—especially those who may be further from the labour market. That’s bad for business, and it’s bad for social mobility.”
With small firms feeling squeezed from all sides, the next steps from Government will be crucial—not only to reverse the confidence slump, but to prevent a significant contraction in the UK’s entrepreneurial base.
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More small firms expect to shrink than grow, warns FSB
