Fragile Gains in Small Business Confidence at Risk From April Cost Rises

Small business confidence is crawling back from historic lows – but without government action, fresh cost pressures could drag it straight back down, the Federation of Small Businesses (FSB) has warned.

FSB’s Small Business Index (SBI), which tracks how optimistic small firms are feeling, registered at -53 in Q1 2026, 18 points up from Q4 2025’s historic low of -71, the lowest level of small business confidence outside the pandemic.

That means confidence has remained negative for eight consecutive quarters.

This month, the ‘April costs crunch’ is hitting, which will push up business rates and standing charges on business energy bills, as well as increasing the National Living Wage and expanding Statutory Sick Pay (SSP) rules. On top of this, business owners will face compulsory Making Tax Digital compliance. An increase in dividend tax means company directors will also see a drop in their take-home pay.

A total of 87 per cent of firms are seeing their costs rise compared to the same period last year – and over a quarter (26%) are reporting double digit rises. The data collected will not fully reflect the steep sustained cost impacts of the Middle East crisis, which will now aggravate an already very difficult situation.

Taxation remains the top driver of cost increases for the fourth quarter running (58%), while labour (56%) and utilities (53%) are a close second and third.

At the same time, more small firms are seeing their incomes fall than rise, with over half (54%) reporting a drop in revenues over the last three months, compared to a quarter (24%) seeing an increase. Meanwhile, 45 per cent expect a fall in the months ahead.

This is feeding through into hiring, with more small firms planning to cut staff (21%) than hire (8%). Over the past three months, 23 per cent of firms reduced staff, with 8 per cent increasing headcount.

Growth expectations for the next year are also low, with more small firms expecting to contract, close or sell than to expand (30% vs 22%). However, this varies by size, with firms employing 10 to 49 people slightly more likely to expect growth than contraction compared to the smallest firms (1 to 9 employees), where more expect to contract than grow.

Late payments remain widespread, with 69 per cent affected – but new legislation announced last week means the Government will act following FSB’s campaigning and reform proposals.

At the next King’s Speech, (May 13) the Government must ensure the late payment legislation is included, so small firms receive critical support in this turbulent period. Ministers should all be working in their departments on how to address the small business costs stack, in order to get any growth from our community.

FSB is calling on the Government to:
• Reduce business rates by using in full the powers it has taken to lower costs within the retail, hospitality and leisure sectors
• Mirror for small businesses the help that consumers have already received, by removing Renewable Obligation costs from bills, therefore offsetting energy standing charge hikes
• Introduce a Statutory Sick Pay (SSP) small employer rebate
• Pledge to hold dividend taxes from further rises for the rest of this Parliament.

Tina McKenzie, Policy Chair of FSB, said:

“Sentiment among the community remains low, driven by mounting costs stemming from policy decisions made by ministers. The outlook for small business growth is bleak, and you can’t get growth in the economy relying just on the UK’s large corporate firms who are feeling relieved after the last Budget.

“Small businesses need a cushion to absorb the costs kicking in over the course of the year, because without changes to business rates, help with energy costs, an SSP rebate and a delay in dividend tax increases, it leaves them in a very vulnerable place. If the Middle East crisis continues to escalate then the Government must keep an open mind about creating targeted business support for those most in need.

“The numbers tell a brutal story, and behind every one of these numbers are business owners who went to bed last night wondering if and how they can make it work. We should be encouraging more people to take the leap and start their own business, while existing businesses want to hire, invest and grow. But they can’t do any of that when they’re busy worrying about bills.

“The next King’s Speech must deliver on the promise to stop large firms paying small businesses late. The UK is unique in being a place where late payment has been considered as acceptable, and the toughest legislation in the G7 cannot come soon enough.

“The Government must tackle rising costs head on and give firms the support they need to take on staff and plan with confidence. Without that, these early signs of recovery risk slipping away before they’ve had a chance to take hold.”