UK small business confidence fell sharply in the third quarter

A new survey has revealed that UK small business confidence tumbled in the third quarter, with concern mounting about next month’s increase in taxes.

According to the Federation of Small Businesses, nearly 33% of small companies expect to downsize, sell, or shut down next year, with only 18% anticipating expansion. The group attributed the gloomy prognosis to a combination of weak growth, high taxation, and rising employment costs.

Falling optimism could lead to reduced spending and investment in the run-up to the budget. Tina McKenzie, policy chair at the FSB, explained, “Millions of small businesses shrinking, closing, or selling up instead of growing means a vicious cycle of a lower tax take, higher unemployment, and greater demands on the state, all exacerbating each other in a downward spiral.”

This comes as ambiguities around taxation in the run-up to the UK budget are likely to weigh on homebuilding for the next six months, pushing the government further away from achieving its housing target.

The IoD reported a score of minus 74 on its business confidence index for September

According to a survey of approximately 1,500 business owners, the picture remains bleak, with insolvencies in the first nine months of 2025 roughly matching those of 2023, which reached a three-decade high. The majority of insolvencies were voluntary liquidations; however, this indicates that many small businesses are opting to close due to ongoing financial pressure.

It is not just entrepreneurs who are preparing to bear an even heavier tax burden. The whole working population faces this risk. When asked about the possibility of higher taxes, Prime Minister Keir Starmer did not rule out a rise in income tax, an increase in national insurance contributions, or even a rise in VAT level, all of which indicate that the government may have to revisit its manifesto commitments on balancing the books.

In September, business executives had warned of a decline in confidence across the business sector. Anna Leach, the chief economist at the Institute of Directors (IoD), noted: “Business confidence has plumbed new depths in September, following a fleeting improvement at the tag-end of summer. Conditions worsened across the board, with cost expectations hitting a record high, driven notably by employment costs.”

At the time, she appealed to Chancellor Rachel Reeves to deliver a pro-growth budget in November that prioritizes businesses. The IoD’s analysis showed that for the month, the main reason for the slipping outlook was increasingly rising wage costs. An overwhelming 83% of business leaders attribute the decline in confidence to the rise in labour costs. Overall, the industry group reported a September reading of minus 74 on its business confidence index.

The BoE had warned that high inflation may persist in the coming months

The Bank of England had stated that the cooling of inflation could be more gradual than expected and persist well into 2026, primarily due to food price pressures. Clare Lombardelli, the Bank’s deputy governor, warned that policymakers should not think inflation shocks will fade quickly.

Although inflation is still high, Catherine Mann, a member of the monetary policy committee (MPC), believes there’s still a chance for more rate cuts. She remarked that “an inflation persistence scenario is playing out.” However, she voted against the BoE’s interest rate cut in August.

Nonetheless, MPC member Sarah Breeden anticipates that it’s unlikely the current inflationary pressures will continue into 2026. She added that there was no reason to believe that the disinflationary momentum from earlier price shocks had weakened.

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