Small Business: Costs Analysis
Introduction
Small business confidence is languishing at -71 points, which is the second-lowest confidence reading recorded in the history of FSB’s Small Business Index. This low confidence score can be attributed, in large part, to the fact that business costs have been rising at an unprecedented rate over the past few years.
Since 2014, on average, 69 per cent of small businesses reported costs were rising in response to FSB’s quarterly confidence survey. Yet since 2022, this figure has climbed to an average of 85%, as a range of cost lines have risen rapidly.
The percentage of small firms reporting a greater than 10 per cent annual increase in costs, has also been stubbornly high since 2022 Going back to 2014, on average 14 per cent of firms reported a greater than 10 per cent annual increase in costs, but in the past four years this has risen to 28 per cent on average.
Cost increases compound over many years, and erode profit margins, in turn leading to lower investment and lower growth The following chart shows the key drivers of these rising costs, as reported in Quarter 3 and Quarter 4 of 2025.
In the past four years, while costs have been rising at an unprecedented rate, the number of firms reporting decreasing revenues has overtaken the number of firms reporting increasing revenues.
As a result of rising costs and revenues failing to keep pace, we now face a situation where more small firms expect to contract over the coming year (35%) than expect to grow (21%). 2025 was the first time in the SBI’s history that this occurred.
With various cost lines set to once again rise substantially in April 2026, this paper outlines some of those upcoming cost pressures, and proposes policy solutions that would alleviate these pressures.
Rising costs of employment
For small employers, labour costs are one of the two most prevalent drivers of cost increases according to the results from FSB’s Quarter 4 Small Business Index survey. Cost increases have been primarily driven by rises in the National Living Wage, and by the increases to employer National Insurance contributions which were announced at the 2024 Autumn Budget. These National Insurance increases were caused by the lowering of the secondary threshold – the point at which National Insurance contributions kick in – from £9,100 to £5,000, and the increase to the rate at which National Insurance contributions are payable, from 13.8 per cent to 15 per cent
The cost increases announced at Budget 2024 were offset by the bold decision to increase the Employment Allowance from £5,000 to £10,500. Based on the recommendation from FSB, this restored the Employment Allowance to its initial value, and ensured that a small employer, with four members of staff on the National Living Wage, would pay no employer National Insurance.
However, in April 2026 there will be a further increase in the National Living Wage and the relevant rates for younger workers and apprentices. This, in turn, will increase the amount of tax that employers will pay in terms of employer National Insurance contributions. The relative fall in the value of the Employment Allowance (vs inflation or staff costs) affects all small employers - but it also means that the policy intention, to cover employer NICs for four staff on the National Living Wage, will no longer be delivered.
The table below demonstrates the significant percentage rises that have occurred over the past two years. While the headline rate of the national living wage has risen by 11.1 per cent in that time period, there has been a striking 26.2 per cent increase in the rate for 18-20 year olds.
An illustration
To illustrate the increase in staff costs that a small employer will face in April, we can look at the example of an employer with nine members of staff1, all of whom are on the National Living Wage which is rising from £12.21 an hour to £12.71 an hour
In 2025/26 the business’s wage bill would be £200,000. The National Insurance bill would be £12,750
1 An average number of staff for an SME, according to FSB analysis of DBT Business Population Estimates 2025
With the increase to the National Living Wage, in 2026/27 the business’s wage costs would increase to £208,190, which is an increase of £8,190.
The business’s employer National Insurance bill would increase to £13,978, which is an increase of £1,229 a year, or a 9.6 per cent increase over the course of the year.
In April 2026, the business will see its employment costs (salary, pension and National Insurance) increase from £217,065 to £226,729. This is an increase of £9,664, or a 4.5 per cent increase.
Since January 2025, this business would have seen its annual employment costs increase by £25,850, equivalent to a 12.9 per cent increase. The business’s employer National Insurance bill over that two-year period would have increased by 46 per cent.
Small employers will typically need to take a range of actions to deal with rising employment costs. Based on FSB’s 2025 evidence to the Low Pay Commission, here are some of the most common actions that employers take:
Consequences of rising employment costs
• Taken lower profits/absorbed costs (62%)
• Raised prices (55%)
• Cancelled or scaled down investment/expansion plans (44%)
• Reduced recruitment (33%)
It is also notable that rising employment costs change employers’ attitudes towards recruitment. 57 per cent of small employers noted that they had become more wary about recruitment in general as a result of rising employment costs. Rising employment costs also risk having a negative impact on Government’s plans to reduce the number of young people not in employment, education or training. 29 per cent of small employers say that they are more wary about recruiting someone with a poor work history, and 26 per cent are more wary about recruiting someone who hasn’t had a job before.
“Where I was considering and planning to employ someone to maintain our shopping site, it is now not viable. I was prepared to take the gamble but with all the hikes in costs for business in general and then the NI and NLW, there's no way I would take the risk.”
FSB Member, Wholesale and retail, South East England
Recommendation
Government should, at a minimum, restore the Employment Allowance so it continues to cover the employer NICs costs of four employees on National Living Wage. It should then be indexed to the National Living Wage so it rises automatically in the future. By uprating the Employment Allowance so it keeps pace with increases in the National Living Wage, Government can show a commitment to continuing to support small firms to recruit. FSB estimates that this would require an increase in the Employment Allowance to at least £10,900.
Statutory Sick Pay
On 6th April 2026, the Statutory Sick Pay regime will see costs increase for small employers in two key ways. First, the Lower Earnings Limit will be removed, meaning that Statutory Sick Pay will be available to all employees, regardless of their weekly earnings. Secondly, there will no longer be three waiting days, which means that employees will be entitled to Statutory Sick Pay from the first day of their absence, not the fourth.
Based on FSB analysis of the Government’s impact assessment, we estimate that, on average, the changes to Statutory Sick Pay will lead to additional costs of £110 per year for every employee who is on the statutory minimum rate.
For a small employer, with nine employees who receive the basic Statutory Sick Pay entitlement, the average additional costs associated with the changes to Statutory Sick Pay will be £990 a year. It is important to note that this purely reflects the additional costs of the Statutory Sick Pay itself, it does not cover the other costs to the business associated with sickness absence, which FSB estimated at just over £3,500 per business in 2022, or £5bn across the economy2 The Government impact assessment also noted that, “with the proposed reforms, these costs to SMBs increase to around £660m (with £390m for small and £270m for micro)”.
Policy impacts
We understand that, from the perspective of employed individuals, the changes to Statutory Sick Pay will have benefits in terms of allowing them to be absent due to illness without having to worry so much about the financial impacts of doing so, with the potential benefit of reducing presenteeism
From an employer perspective, the most immediate impact is the additional cost coming in from April 2026, estimated at £990 a year. The Government’s own impact assessment acknowledges that “businesses, particularly small enterprises, might bear the increased costs as they are more likely to pay SSP only (as opposed to offering more generous occupational or contractual sick pay arrangements which are unaffected by these proposals).”3
However, there is a risk of other negative policy impacts associated with Statutory Sick Pay, unless a rebate is introduced for small employers If employers bear the costs of sickness absence, then the natural consequence of this is that employers whose employees take more sick leave will be worse off than those who take less sick leave. This risks disadvantaging the small businesses that employ people who are disabled or have health conditions.
If UK is to succeed in reducing health-related economic inactivity, and keep as many people as possible in employment, then employers should be encouraged and incentivised to employ people with health conditions, as 51 per cent4 of small employers do. 34 per cent of small businesses said
2 https://www.fsb.org.uk/resources/policy-reports/business-without-barriersMCQUI2L27TSFHF3KUR3ZGLOI6D2U
3 Impact assessment: Improve access Statutory Sick Pay removing Lower Earnings Limit and waiting period
4 https://www.fsb.org.uk/resources/policy-reports/business-without-barriersMCQUI2L27TSFHF3KUR3ZGLOI6D2U
that a Statutory Sick Pay rebate would encourage them to employ more people currently not in employment.5
Employers who currently pay their staff an unenhanced level of sick pay will be the ones who will most notably see their costs increase as a result of the changes to Statutory Sick Pay. It is therefore notable that small businesses who employ individuals who were previously unemployed, or who have gaps in their work history, or who have lower level qualifications are all more likely to pay unenhanced Statutory Sick Pay. Unless the costs of Statutory Sick Pay can be mitigated for these employers, then it will result in a perverse outcome whereby those employers who are doing the most to reduce unemployment are being the most negatively impacted by the changes to Statutory Sick Pay.
In 2022, FSB joined forces with the TUC to call for Government to introduce a permanent Statutory Sick Pay rebate for small employers, as part of a package that would extend sick pay for all At the moment, the Government are proceeding with the extension of sick pay entitlements for individuals, but have not yet confirmed the necessary support for small employers.
Recommendation
Government should introduce a Statutory Sick Pay rebate for small and medium employers, to mitigate the cost impacts of Statutory Sick Pay changes, and to avoid a perverse incentive whereby employers who employ those with health conditions or disabilities find themselves financially worse off as a result. There are various different models that could be used for an SSP rebate in order to control fiscal costs, including the potential to make the rebate claimable where an individual has had multiple absences or a single period of longer absence (i.e. 5 days plus). This would help the Government achieve its aim to reduce the number of NEETs, as a third (34%) of small employers say an SSP rebate would encourage them to employ more people who are not currently in employment
5 FSB National Living Wage Survey, May 2025
Business Rates
From 1st April 2026, businesses will be issued with new business rates bills in respect of the 2026/27 financial year For many, these bills will be significantly different from 2025/26 – we focus here on England due to the following factors and changes within the system:
- Loss of the 40 per cent discount for retail, hospitality and leisure (RHL) businesses.
- Revaluation of premises. The outcomes of this will vary from business to business, but the average increase in rateable value is 19.2 per cent
- Changes to multipliers. Because this is a revaluation year, multipliers have reduced.
- For businesses within the retail, hospitality and leisure sectors they have a 5 pence reduction on their multipliers vis-à-vis non RHL businesses. Government had the power to bring in a 20 pence discount for these businesses, which would have replicated the effect of the 40 per cent discount for small businesses, but they only used a quarter of this power.
- For businesses with large premises (rateable value over £500,000) their multipliers will be increased by 2.8 pence above the national standard multiplier. Government had the power to increase this by 10 pence.
- Transitional relief, or Supporting Small Business relief, which ensures steep increases in bills are phased in over multiple years.
The cumulative impact of these changes mean that small businesses in the retail, hospitality and leisure sectors will be facing on average a 52 per cent increase in bills, which will be phased in over the next three years. This will affect a wide range of businesses, from butchers to pharmacies, dry cleaners to cafes, garden centres to hairdressers.
Illustration - small shop or restaurant whose rateable value increases from £16,000 to £19,104
2025/26 business rates bill = £4,790.40. Recalculated business rates bill after revaluation, loss of discount and new multiplier = £7,297.73
The recalculated bill includes the increase in rateable value, lower multiplier of 38.2p, and the loss of the 40 per cent discount. Once transitional reliefs have expired therefore, this small restaurant will see a business rates increase of 52 per cent by 2028/29.
However, because of transitional reliefs and the supporting small business scheme, the increase in bills for 2026/27 for this property is £800, then a further £800 for 2027/28, then capped at a 25 per cent increase for 2028/29. In this scenario, the percentage increase in 2026/27 is a substantial 16.7 per cent
2026/27 rates bill = £5,590.40
2027/28 rates bill = £6,390.40
2028/29 rates bill = £7,297.73
On 27th January the Government announced a further support package for pubs and music venues. As a result of this further support, in 2026-27, pubs will receive a 15 per cent discount on their
expected business rates bills, followed by a two-year real terms freeze (i.e. with only inflationary increases)
While it is right that Government has recognised the risk to pubs and stepped in to provide additional support, it was a mistake not to address the risks that face other small businesses, especially within the retail, hospitality and leisure sectors, who are still facing an average 52 per cent increase in their business rates over the next three years For some businesses, particularly those losing access to small business rate relief, the increase can be much more than the average.
Coffee Shop – South East England
Its owner says a combination of higher business rates, VAT, staff costs and additional council charges have reduced his profit margins significantly. As a hospitality venue, he has benefited from business rates relief, but since his premises were re-rated and his relief reduced, his annual bill has gone up from £1,200 to £12,000.
Evidence from FSB’s Small Business Index6 draws particular attention to the plight of retail and hospitality businesses after the news about increases in business rates:
- The wholesale and retail sector has an overall confidence score of -92 points – a full 21 points worse than the national average of -71. The accommodation and food sector has an even more negative confidence score of -104
- When asked about drivers of cost increases, 66 per cent of wholesale and retail businesses cited taxation as a key driver of cost rises, and 75 per cent of accommodation and food businesses cited it. Both figures are higher than the national average of 64 per cent
- 41 per cent of wholesale and retail businesses expect to contract or close over the next twelve months, and the same is true for 45 per cent of accommodation and food businesses. This can be compared to the national average of 35 per cent of small businesses
While the increased bills that many are facing as a result of the 2025 Budget are significant, there are other changes to the business rates system which are placing pressure on small businesses. One notable example has been a change in how the Valuation Office Agency (VOA) has treated shared office spaces over the past year In response to emerging caselaw, the VOA has increasingly been treating shared office spaces as a single space for business rates purposes, resulting in loss of Small Business Rates Relief for the individual businesses within the office, and in some cases backdated bills that cannot be recovered from tenants. This loss of relief due to these legal changes could directly impact up to 150,000 small businesses and sole traders
6 Survey December 2025
Recommendations
Government should extend the three-year support package for pubs to other small businesses in the retail, hospitality and leisure sector In the short term, this will give these businesses the confidence to continue trading. In the longer term, Government should use its legal powers in full to ensure the equivalent of the 40 per cent discount for small businesses in these sectors.
Government should increase the Small Business Rate Relief (SBRR) threshold to £25,000. Over half (54%) of high street small businesses say they would invest in or grow their businesses if the SBRR threshold was increased from £12,000 of rateable value to £25,000.
Government should legislate to create a fair business rates framework for flexible workspaces that protects small firms’ eligibility for SBRR. Shared office spaces, and other shared spaces, are an efficient model that should not be deterred by the tax system. Government and the VOA should also commit that any future changes will not be applied retrospectively.
Energy costs
Since the energy price crisis in 2022 and 2023, energy prices have risen to the fore as a significant cost pressure. While electricity prices have significantly reduced since the peak in the winter of 2022/23, they remain significantly higher than they had been before. In 2025, FSB estimated that in the four years between July 2021 and July 2025, small firms had experienced an increase in electricity costs of 80 per cent. This comprised a 78 per cent increase in wholesale electricity costs, and a 188 per cent increase in standing charges over that period.
In the most recent Small Business Index – Quarter 4 of 2025 – an average of 47 per cent of small firms cited utilities as a key driver of rising costs. The following table shows the breakdown by sector7
7 The chart above displays the sectors for which we had a viable data sample.
Business energy bills don’t have a consistent charging structure, and they vary widely depending on the supplier, the business location ,the type of tariff and the sector. However, there are some common elements. They will all contain an element driven by wholesale costs, which is the price of the gas and electricity itself that the supplier needs to incur. The bill will also have a significant proportion made up of non-commodity costs, some of which are incurred through standing charges. These standing charges have become an increasingly substantial cost over the past few years, as illustrated by this technology company whose daily standing charge is set to rise to £11 a day.
“Following last year’s standing charge rise to £6.48, over 65 per cent of the [most recent] bill is fixed charges, only £220.17 out of £586.63 is energy. For this year’s renewal we are now looking at around £11 standing charge, if everything else remains equal the fixed charges will be over 70 per cent of our bill. These costs hit small businesses disproportionately and they completely disincentivise energy saving, as energy is such a small percentage of the bill.”
FSB Member, Technology business, Scotland
The composition of standing charges varies from contract to contract, but they will typically cover the costs of grid investments incurred by the National Energy System Operator and ‘local’ network distribution incurred by the District Network Operators, which in turn are recovered from suppliers and passed on to customers.
FSB estimates that in April, firms will on average see their annual standing charges increase by 44 per cent. This is based on a significant increase in grid investment costs, which will be passed on to bills, and for the purpose of this calculation we have assumed they are included within the standing charge element of the bill. For a business with an annual electricity consumption of around 40,000kWh (typical for a small restaurant, hair salon or gym), they would see their annual standing charge rise from £3,680 to £5,283.
But grid investment costs are not the only non-commodity costs which are added to energy bills. There are a range of policy costs which will add cost to a small business energy bill as the following table illustrates, in respect of a business consuming 40,000kWh a year.
Government announced at Budget 2025 that it would seek to reduce the level of policy costs on household bills through the removal of the Energy Company Obligation, and the moving of 75 per cent of Renewable Obligation costs off household bills and on to general taxation. Similarly, Government has sought to alleviate energy costs for energy-intensive businesses through an existing support scheme and through the announcement of the British Industrial Competitiveness Scheme, due to commence in 2027. However, non-energy intensive small businesses fall outside the scope of these support mechanisms, despite the impact that rising energy costs have on the running of their business, and despite the fact that micro-businesses will have a similar amount of knowledge of the energy market as a domestic consumer.
Recommendations
Government should remove up to 75 per cent of Renewable Obligation costs from non-domestic energy bills, mirroring the support that exists for households. This will offset some of the increased costs that are expected due to rising standing charges.
Government should commit that SME energy bills will not be used to subsidise energy intensive industries. It is welcome that DESNZ and DBT have confirmed that BICS costs will not be added to other business energy bills, and Government should go further and seek to remove the cost of the existing energy intensive support from business energy bills.
8 Expected to be phased out as Warm Homes Plan comes in.
Dividend Tax
On 6th April 2026, the basic and higher rates of Dividend Tax will each increase by two percentage points. The basic rate will rise from 8.75% to 10.75% and the higher rate will rise from 33.75% to 35.75%.
For a company director, this will reduce their take home pay, as the most efficient way to withdraw revenue from the business involves taking £12,570 worth of salary – up to the Personal Allowance limit – then taking the remaining money as dividends once employee National Insurance and Corporation Tax have been deducted.
Illustrative example – company with £50,000 pre-tax profit
Prior to April 2026, if a company had accumulated £50,000 worth of pre-tax profit, and the company director wanted to take it all out of the business, then they would end up with £39,440 as their takehome pay, once the relevant deductions had been made for employee National Insurance contributions, Corporation Tax and Dividend Tax at 8.75%.
Post April 2026, if that same company director accumulates £50,000 worth of pre-tax profit, which they wanted to take out of the business, then they would end up with £38,862 of take home pay, which is a reduction of £578 to live on (or a 1.5% reduction).
Recommendation
Government should use its call for evidence on tax support for entrepreneurs to strengthen the incentives for everyday entrepreneurs to invest in their business. This should include protecting and strengthening the value of Business Asset Disposal Relief, which is a well-known and effective incentive for investment, that 83 per cent of small business owners anticipate using in the future. Government should defer the two percentage point increase to the basic rate of Dividend Tax until April 2027. The two percentage point increase will otherwise reduce the money available to live on for entrepreneurs who are earning less than £50,000 a year.
Other changes
There are a number of other changes that small businesses and the self-employed could face from April 2026 onwards. These include:
Making Tax Digital for Income Tax Self-Assessment: This will affect self-employed and partnerships earning over £50,000 a year, and require the purchase of MTD-compatible software, and quarterly returns.
Company filing fees: One of the most significant increases of regulatory fees in recent years has been from Companies House who have increased most of their fees for the second time in under two years, with the latest set of increases due to be in force from February 2026. The latest increase using software to file company incorporation documents has increased to £100 from £50, meaning a 100% increase for incorporation, and the fee for digital annual confirmation statements has increased from £34 to £50, an almost 50% increase.
Conclusion
While no two businesses will be affected in the same way by the changes, the evidence from FSB’s Small Business Index is that no sector is unscathed by the various cost lines that have continued to rise over the past four years, and which will again increase significantly in April
Any organisation with staff is under substantial pressure to reduce headcount due to rising costs –the example of a nine-person business shows that between January 2025 and April 2026, the business has had to find an extra £25,000 – equivalent to the cost of an additional staff member –due to rising wages and employment taxes.
Many high street businesses will find themselves caught by several of these cost increases at once. It is not difficult to imagine a small café or launderette, who will be facing rising staff costs of £25,000 a year, who will incur extra Statutory Sick Pay costs of £990 a year, will see the standing charges on their energy rise by £1,600, and which is facing an extra £800 in business rates in April, with further increases to come. If they are fortunate enough to make a small profit, then the owner/directors will likely face extra costs in terms of Dividend Tax when they seek to remunerate themselves.
If we are to turn business confidence around this year, then there is a strong case for the Government showing that it is prepared to alleviate a fraction of these cost increases through implementing the recommendations in this paper. By doing so, Government can avoid pushing more small business owners into the difficult decision to close or downsize their business.
It is also important to consider the impact of these rising costs on the next generation of business start-ups. There will be a deterrent effect to those considering starting up a new business at the moment, especially if you would need a business premises or staff. Entrepreneurs are taking a risk by going into business, and that risk must have a credible reward associated with it. But the diminishing prospect of making a profit that you can live on, accompanied by increasing taxes on dividends, and ever increasing administrative costs and burdens could well encourage the next generation of entrepreneurs to avoid the risk of starting a business altogether.
Cost Base Element
Business rates
Employment Costs
Illustrative changes
Small retail hospitality or leisure business9 will, on average, face a 52 per cent increase in their business rates bill over three years. The first £800 increase will come in April 2026.
Between January 2025 and April 2026 an employer of nine people on National Living Wage will see its annual employment costs increase by £25,850, equivalent to a 12.9 per cent increase. The business’s employer National Insurance bill over that twoyear period would have increased by £4,400, or 46 per cent
9 Assuming they currently sit within the small business multiplier, experience an average increase in ratable value, and remain within the small premises multiplier.
SSP
Energy
Dividends
For a small employer, with nine employees who receive the basic Statutory Sick Pay entitlement, the average costs associated with the changes to Statutory Sick Pay will be £990 a year.
For a business consuming 40,000kWh of electricity per year, annual standing charges are estimated to increase by £1,600 from April.
A two percentage point increase in Dividend Tax for a company director, meaning a director looking to take £50,000 gross profit out of the business will face a £578 reduction in take-home pay.