UK Small Firms Face Third Straight Quarter of Decline

UK small businesses experienced a third consecutive quarter of slowing sales growth in the three months to June, while hiring fell to its weakest pace in six months, according to new data from small business platform Xero.

The latest Xero Small Business Insights (XSBI), based on anonymised data from 440,000 UK small businesses, suggests rising fuel costs and continued economic uncertainty are weighing on business confidence, leaving many firms reluctant to recruit or invest.

Annual sales growth slowed to 3.6% in the June quarter, down from 4.2% in the previous quarter and 5.5% at the end of 2025. The figure is also significantly below the long-term average of 8.5%.

Hospitality remained one of the weakest-performing sectors, with sales declining by 0.5% year-on-year despite warmer weather during June. Retail sales grew by just 2%, while arts and recreation recorded growth of 3.2%.

Agriculture was the poorest-performing sector, with sales falling 8.6% compared with a year earlier as prolonged dry weather and concerns over wheat quality hit the industry.

Construction continued to outperform the national average, recording sales growth of 4.6%, while transport and logistics posted the strongest increase at 8.2%, driven by higher freight prices linked to rising fuel costs.

Employment growth also lost momentum, slowing to 1.7% year-on-year in the June quarter, down from 2.4% in the previous three months. It marks the weakest hiring performance since the final quarter of 2025. Healthcare, real estate services and retail recorded the strongest employment growth, while hospitality and the information, media and communications sector employed fewer people than a year earlier.

Kate Hayward, UK Managing Director at Xero, said the figures should concern ministers. “Things aren’t improving for our small business economy, which should be a real wake-up call for the new Labour government. Even the warmer weather in June hasn’t given our retail and hospitality sectors the boost they so desperately needed. We’re seeing businesses holding back on hiring and growth, and all of this pressure is being compounded by payment times creeping up and rising fuel costs. It’s not sustainable.”

Hayward said the Government’s first Autumn Budget would be an important test of its commitment to smaller firms. “The Autumn Budget is shaping up to be a real test for the new government to show they are listening and backing their pro-small business rhetoric. We need policies that restore small business confidence, improve cash flow and create the conditions to invest, hire and grow. We’ll be continuing to push for this.”

Business owners say increasing costs are forcing difficult decisions. Kyle Hyams, owner of Orlas Coffee & Gelato and Aoifes Gelato, said:

“Staff costs and the cost of goods have never been higher for our three businesses, so we’re constantly weighing up whether to reduce our team and the quality of what we sell, or hold our nerve and hope conditions improve. For now, we’re holding steady. We’ve watched well-established businesses close this year, but we’ve managed to open two new sites and have taken on a lease to renovate a third site. But we’re really depending on a strong summer to fund this.” He added: “We provide income to 50 people employed across our businesses, but the support for businesses that are improving their communities isn’t there. We’d love to see some control on food prices, a cut in VAT for hospitality, and grants or government-backed loans would make a real difference right now.”

The report also found signs of increasing cash-flow pressures. Small businesses waited an average of 29.1 days to receive payment after issuing invoices during the June quarter, up from 28.8 days in the previous quarter. Businesses were also paid an average of 8.3 days late, compared with 8.0 days previously.

While payment times remain broadly stable, Xero said the increase suggests businesses are holding onto cash for longer, creating additional pressure on suppliers and making it more difficult for smaller firms to manage everyday costs. Meanwhile, small business wages continued to rise steadily, increasing 2.8% year-on-year during the quarter, broadly in line with the pace seen over the past year.