Increased labour costs pushing small businesses to the brink, FSB warns
Higher employment costs and increased business rates could force many small businesses into closure, the Federation of Small Businesses (FSB) has warned.An increase in the national living wage – due to come in from April – and higher national insurance contributions (NIC) are expected to coincide with a hike in business rates bills and energy standing charges.This is contributing to what the FSB described as a “cost crunch” for small businesses.Cost of employing low-wage workers to hit record high, says think tankUnemployment reaches near five-year high, ONS data showsUK employment hits lowest level in 13 years as rising labour costs dampen business confidence, report findsThe FSB estimates that a small firm employing nine staff on the national living wage will see its annual employment bill rise by £25,850 between January 2025 and April 2026, a 12.9 per cent increase. Over the same period, its employer NIC bill will rise by £4,400 – a 46 per cent increase.For Tim Prizeman, who runs Surf ‘n’ Fries café in Thatcham, West Berkshire, the financial pressure is already intense. “I regret it every day because of the current environment,” he said. “It’s not just that we can’t grow our headcount, it’s that our existing staff have become too expensive.”A typical small shop or restaurant will see its business rates climb from £4,790 to £5,590. Changes to dividend tax, a primary method of take-home pay for many small business owners, will cost someone earning £50,000 an additional £578 a year, while reforms to statutory sick pay are expected to add around £990 annually for a nine-employee company.“Small businesses are resilient – but they are not invincible. They simply cannot go on absorbing endless cost increases,” warned Tina McKenzie, policy and advocacy chairwoman at the FSB.As a result of these mounting employment costs, 35 per cent of small firms are planning to either close their doors or scale back operations in the coming year, an FSB survey found.The figure rises to 41 per cent in wholesale and retail, and 45 per cent in accommodation and food services. Overall, more small businesses expect to contract (35 per cent) than expand (21 per cent).The FSB has written to the chancellor ahead of March’s spring forecast, urging action to protect the UK’s 5.7 million small businesses and self-employed workers before a cluster of tax and cost changes take effect.Mark Hamson, managing director of insurance at Westfield Health, said smaller employers faced a built-in disadvantage when costs rise. “It’s not just that the costs are rising, but also the smaller employers have fewer ways to absorb them,” he explained. “Large corporations can negotiate volume discounts on group insurance and healthcare plans, deploy HR teams to optimise benefits and find tax efficiencies, and draw on financial buffers to weather a difficult year.”This means that small employers have to pay more proportionally per staff member.Many smaller companies also have no HR director, Hamson added, meaning that the business owner or financial lead was often relied upon to manage compliance and recruitment cost pressures. Retail businesses are also struggling to manage with higher employment costs. The British Retail Consortium (BRC) reported that 61 per cent of retail chief finance officers were already planning to reduce staff hours, while 45 per cent had frozen recruitment entirely.The hiring slowdown, combined with rising retail crime and job insecurity, led to a marked decline in worker wellbeing at the end of 2025, according to data from the Retail Trust and AlixPartners.Helen Dickinson, chief executive of the BRC, said that the economy remained "fragile", with weak wage growth, rising unemployment, low consumer confidence and falling demand.While Dickinson recognised the need for more high-quality, well-paid jobs, she warned that government policy risked adding to the burden on retailers.“The Employment Rights Act is the biggest shake-up of employment rules in a generation, and how it is delivered will make or break job opportunities,” she said. “If the government fails to consider business needs on policies including guaranteed hours and union rights, they will add complexity and reduce flexibility, ultimately stripping away entry-level and part-time opportunities at precisely the moment the country needs them most.”For more information, read the CIPD’s factsheet on how an understanding of the macroeconomic context can inform HR practice
