Which Rising Costs Are Squeezing Small Business Margins Most?

Which Rising Costs Are Squeezing Small Business Margins Most?

Tax-related costs have overtaken energy prices as the most commonly reported obstacle facing UK SME employers, while rising wages, National Insurance, fuel and material costs are continuing to put pressure on margins.

For several years, energy prices dominated discussions about the pressures facing small businesses. The latest government research suggests that the picture has changed.

According to the Government’s Longitudinal Small Business Survey 2024, taxation, VAT, PAYE, National Insurance and business rates were identified as a major obstacle by 61% of SME employers.

This was up from 45% in 2023 and 41% in 2022, making tax-related costs the most frequently reported obstacle to business success. Energy prices remained a significant issue, but the proportion of businesses identifying them as an obstacle fell from 60% in 2022 to 50% in 2024.

The biggest obstacles reported by SME employers

Source: Longitudinal Small Business Survey 2024.

Employment costs are becoming harder to absorb

The survey was conducted before several recent employment-cost changes had fully taken effect.

From April 2025, the employer National Insurance rate increased from 13.8% to 15%, while the salary threshold at which employers begin paying it fell from £9,100 to £5,000. The maximum Employment Allowance was increased from £5,000 to £10,500, providing some protection for eligible employers, but businesses with larger payrolls may still have faced a material increase in employment costs.

The National Living Wage then increased from £12.21 to £12.71 an hour in April 2026, a rise of 4.1%. Rates for younger workers rose more sharply, including an 8.5% increase for workers aged between 18 and 20.

Recent Office for National Statistics business survey data show how employers are responding. In May 2026:

• 66% of businesses with at least 10 employees said staffing costs had increased during the previous three months.
• 54% reported an increase in hourly wages during April.
• 44% said they would respond to future employment-cost increases by raising prices.
• 38% expected to absorb the additional costs within profit margins.
• 23% expected to reduce employee numbers.

This creates a difficult choice. Businesses can increase prices and risk losing customers, reduce staffing and limit their capacity, or accept lower margins.

Energy and fuel remain major concerns

Although energy prices are no longer the most frequently reported obstacle, they remain a serious concern, particularly for businesses operating vehicles, machinery or energy-intensive premises.

In late May 2026, 62% of businesses reported at least some concern about energy prices. This increased to 73% among businesses with at least 10 employees.

Fuel costs caused even greater concern. Around 68% of businesses were concerned about fuel prices, rising to 74% among businesses with at least 10 employees. Concern was highest in transportation and storage, at 84%, followed by accommodation and food services at 82%.

These costs can spread through the wider economy. A rise in fuel or transport costs does not only affect logistics companies. It may also increase the price of deliveries, stock, components and outsourced services for businesses across other sectors.

Material costs are rising faster than selling prices

Manufacturers are also facing a widening gap between the prices they pay and the prices they receive.

The ONS Producer Price Inflation report for May 2026 found that input prices paid by UK manufacturers increased by 8.7% over the previous year. Factory-gate selling prices increased by 4%.

The difference does not prove that every manufacturer’s margin has fallen, but it does suggest that many businesses may be unable to pass the full increase in costs on to customers.

Some of the largest annual increases included:

Import prices for materials and fuels also increased by 10.1% over the year, adding further pressure for businesses that rely on overseas suppliers.

Premises costs could add another layer of pressure

The 2026 business-rates revaluation has also changed the rateable values assigned to commercial properties in England and Wales.

According to Valuation Office Agency statistics, total rateable value increased by 19.4% between the 2023 and 2026 lists. Industrial properties recorded an increase of 21.4%, while London had the largest regional increase at 22.5%.

A rise in rateable value does not translate directly into an equivalent increase in a company’s final rates bill. Multipliers, reliefs and transitional arrangements also apply. However, premises costs remain another area that businesses will need to monitor closely.

Rising costs are delaying growth

The effect is not limited to short-term profitability.

Among SME employers with plans to grow, 57% said rising costs had affected those plans. This increased to 65% among small businesses.

Recruitment plans were the most likely to be affected, followed by capital investment, research and development, and the launch of new products and services. More than four in five businesses affected by rising costs pointed to non-energy costs as a factor.

This suggests that the margin squeeze is beginning to influence decisions that would otherwise support productivity and economic growth.

Protecting cash flow as costs rise

Businesses facing rising costs should first establish whether the pressure is temporary or structural. Reviewing supplier terms, pricing, stock levels, payment collection and overheads can help identify where cash is being tied up.

Where a viable business is experiencing a temporary working-capital gap, funding may provide additional flexibility. Options such as invoice finance, revolving credit facilities, asset finance and structured business loans can help businesses spread large costs, release cash from unpaid invoices or continue investing while waiting for revenue to arrive.

Funding should support a clear commercial plan rather than postpone an underlying profitability problem. Used appropriately, however, it can help businesses avoid cutting back on recruitment, equipment or stock solely because costs and income fall at different times.

Proposed comment from John Carter, Managing Director of British Business Funding:

“Small businesses are being squeezed from several directions at once. Employment costs, tax liabilities, energy, fuel and supplier prices all affect cash flow differently, but they often arrive before the additional revenue needed to cover them.

“The concern is that otherwise healthy businesses may delay recruitment or investment because they do not have enough short-term flexibility. Businesses should review their costs early, assess what can realistically be passed on and consider their funding position before cash flow becomes urgent.”

Methodology note: Figures relate to SME employers with between 1 and 249 employees unless stated otherwise. The Government’s Longitudinal Small Business Survey figures cover 2024. More recent ONS statistics have been included to show how employment and producer costs have developed since that survey.

If sharing this data externally, please credit: https://britishbusinessfunding.co.uk/