New data from the Federation of Small Businesses (FSB) reveals that small firms’ confidence levels are in a rut amid a rising tide of costs and taxes.

FSB’s latest Small Business Index (SBI) for Q1 2025 shows a modest improvement in small business confidence, now at -40.7 points, compared to -64.5 in Q4 2024, though it still represents a very negative level.

A striking 85 per cent reported rising costs, compared to the same period last year, with nearly a quarter (23%) saying their costs had increased by more than ten percent – a clear sign of mounting financial pressure.

The top three biggest cost drivers are utilities (52.7%), labour costs (51.5%) and taxes (42.7%).

Tax is in fact the second biggest barrier to growth, with 47 per cent citing it as a key factor, marking the highest level in over a decade.

Employment trends add another layer of concern, as only eight per cent of businesses saw an increase in staff numbers over the quarter, while more than double that – 21 per cent – had to reduce their workforce.

This could be partly due to the challenges introduced by the upcoming Employment Rights Bill, which FSB has warned will make hiring more challenging for small firms, adding to the pressures they already face. Increases to National Insurance Contributions (NICs) above the expanded Employment Allowance threshold are also causing concern.

Elsewhere, twice the number of firms have reported lower revenues in the past quarter (50.6%) than reported higher revenues (25.2%).

Worryingly, just 50 per cent of those who applied for credit had their applications approved, and nearly half of these approvals (47%) were used to manage cash flow.

To mitigate these issues, FSB is asking for the Government to ensure:

• The Spending Review includes promises from every Cabinet Minister to help small businesses in the department they lead, and includes a Statutory Sick Pay Rebate to help with the rising cost of sickness absence.

• The Small Business Strategy ends the scourge of late payments by delivering a full, strong payment package that ensures small firms are paid on time, by giving audit committees oversight of payment practices.

• The King’s Speech contains a dedicated Small Business Bill, including reforms to personal guarantee rules to make it easier for small businesses to invest.

• The Autumn Budget focuses on creating conditions for growth, including delivering on the Chancellor’s pre-election promise to reform business rates to help small businesses and the high street, and indexes the Employment Allowance to the National Living Wage

• The Employment Rights Bill is amended to give greater protection to firms taking on new staff, removing increased tribunal risks during the initial employment period.

Tina McKenzie, FSB’s Policy Chair, said: “There’s been a modest improvement in small firms’ confidence, but the outlook remains pessimistic."

“There is no way to sugarcoat the impact that rising costs and higher taxes are having on small firms. Their already tight budgets are being stretched thin, and it’s making it harder to thrive in a demanding economic climate."

“The upcoming Employment Rights Bill is weighing heavily on the minds of small business owners. It’s clearly holding up job creation at a time it’s needed the most, pushing the idea of investing and expanding to the back of their minds."

“Meanwhile, looming rises to Employer National Insurance Contributions (NICs) are also taking a toll. However, it’s important to remember that small firms can benefit from the Employment Allowance, which FSB co-created with the Government, and exempts employers from paying the first £10,500 of national insurance."

“The focus now must shift on easing these pressures on small businesses. Lower taxes and practical support must take priority in the Autumn Budget to give small firms the breathing room they need to thrive."

“That would allow small businesses to reinvest, grow and play their part in driving the economy forward.”