Small firms stop hiring as economic fears return to Covid levels

Britain's smallest businesses are running out of confidence – and cash

Britain's smallest employers are pulling up the drawbridge. Recruitment is being frozen, owners are putting their own money into their businesses, finance applications are being rejected and more firms now see threats ahead than opportunities. The latest UK Finance SME Finance Monitor suggests this isn't simply another dip in confidence: some of the pressures facing small businesses are back at levels last seen during the pandemic. There is a glimmer of better news from the OECD, but for thousands of microbusinesses the question is whether economic conditions improve quickly enough for them to start investing, hiring and growing again.

SMALL BUSINESSES Stagnation?

A perfect storm of rising costs, political uncertainty, stalled recruitment, and weakening confidence, has brought the UK’s small and micro businesses to their knees.

The latest UK Finance SME Finance Monitor paints a stark picture: the economic climate is now seen as a barrier at Covid‑era levels, tax is a major pressure point, and more owners say the future looks threatening to their businesses rather than presenting them with opportunities.

The Economic Climate

42% of small and medium sized businesses see the economic climate as a key barrier, matching levels last seen in late 2020 during Covid lockdowns. Small and micro businesses feel this most sharply with

• 45% of 1–9 employee firms saying the economic climate is a barrier,

• 42% of 10–49 employee firms saying the same, and

• larger businesses (50–249 employees) less affected at 27%, showing how micro firms absorb the worst shocks.

This is the clearest sign yet that small businesses are operating in recession‑like conditions.

Tax Barrier

A new measure added to the UK Finance survey in 2026 shows just over a third of small and medium sized businesses see current levels of tax as a barrier making it the fourth biggest challenge overall. For small employers, it’s even more severe with

• 46% of 1–9 employee businesses saying tax is a barrier and

• 48% of 10–49 employee firms saying the same.

Higher costs are still the biggest problem, but these data confirm that tax pressure is no longer just background noise, but a blocker to growth.

Political Uncertainty

39% of businesses cite political uncertainty as a barrier, up from 26% in 2024. This matters because decision‑making slows to a crawl when there’s uncertainty and that means all sorts of business investment from people to innovations and borrowing, stalls.

Squeezing Small Firms

Higher costs are a top‑three barrier at 38%, but the pain is concentrated among employers with 46% of 10–49 employee businesses now seeing higher costs as a barrier, up from 36% in 2024. Businesses with no employees have seen little change, because those micro businesses are absorbing cost shocks they can’t pass on.

Recruitment

The most worrying trend is that 39% of businesses now have no plans to recruit, up from 24% in 2022. For micro businesses, the freeze is dramatic:

• 42% of 1–9 employee businesses have stopped recruitment; double the level in 2022 and

• only 15% of 50–249 employee businesses say the same.

When small businesses stop hiring, local economies slow.

Fewer Opportunities

Confidence has flipped. Almost a quarter see the future offering opportunities, more than a third see mostly threats, and the difference between the two figures is -11, the lowest ever recorded.

Micro businesses are most pessimistic. 37% of 1–9 employee businesses and 35% of businesses with no employees see threats.

Personal Finances

A third of small businesses injected personal funds into their businesses, and most did so because they had to, not because they chose to. Again, the highest figures are amongst the smallest businesses. Founders are using personal savings to keep businesses afloat.

External Finance

Use of external finance has jumped to 51%, with maxing out credit cards and overdrafts the most popular methods and rising sharply. 18% of businesses using finance are worried about repayment, and 39% of applications for external finance are declined. Pre‑pandemic around 7 in 10 applications succeeded. Micro businesses are hit hardest with only 42% of businesses with no employees having their applications for finance approved, compared to 78% of larger businesses.

Pulling Back

Only 27% of small businesses grew in the past year, far below pre‑pandemic levels of 40%, Meanwhile, a third declined, far above pre‑pandemic levels of 10–20%. This amounts to the stagnation we’ve been worrying about.

Structural Challenge

The data is clear: small and micro businesses are under intense pressure. The UK Finance research shows there’s pandemic‑level economic strain and increased personal financial risk due to rising tax, political uncertainty, higher costs, declining confidence and reduced access to finance. This needs addressing with targeted policy, simpler regulation, fairer taxation, and accessible finance.

Small businesses are the backbone of the UK economy but right now, they’re carrying too much weight with too little support.

There is one bright spot. Just hours after the UK Finance SME Finance Monitor was published the OECD forecast lower that expected inflation to come and better growth figures for the UK in 2026 than it had previously predicted. If that optimism were realised the picture could become rosier. Where there are forecasts, there may be hope.