Tax-related costs have overtaken energy prices as the biggest obstacle facing UK small businesses, according to a September 2026 SME report. A new study released by experts at British Business Funding broke down the key costs creating the greatest barriers for small business employers.
Taxation issues, including VAT and National Insurance, are now cited by 61% of SMEs as a business obstacle. The second biggest barrier is energy costs, which concern half of small business employers. Market competition remains among the most prominent obstacles for SMEs, but concerns about it recorded the largest decline, falling by 8% year on year.
These findings come as small and medium-sized enterprises continue to navigate a challenging cost environment. Official data confirms several of the pressures highlighted in the report. The National Living Wage rose to £12.71 an hour from April 2026, while the employer National Insurance rate stands at 15%. The maximum Employment Allowance is £10,500.
Employment costs squeeze thin margins
Employment costs are rising on multiple fronts at the same time, including National Insurance increasing from 13.8%–15%, a rise in the maximum Employment Allowance to £10.5K, and an increase in the National Living Wage to £12.71. Many small firms operate with limited margins and fewer options to absorb higher payroll bills compared with larger companies, leaving SMEs with only a few ways to mitigate these new costs. Around 44% reported that they will increase their prices, while 23% have to consider reducing their workforce, although raising prices risks affecting demand in competitive markets.
Energy and fuel remain major concerns
Energy and fuel costs are an issue for all small businesses, but especially for those operating vehicles, machinery, or energy-intensive premises. Higher fuel bills affect logistics and delivery firms directly, while hospitality and accommodation providers face elevated costs for heating, lighting, and kitchen operations. In summer 2026, 73% of companies with more than 10 employees described energy prices as a concern. The greatest concern about fuel was recorded in the transportation and storage industry at 84%, followed by accommodation and food services at 82%. Although wholesale energy prices have fluctuated, the overall level remains a significant worry for many employers.
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. Office for National Statistics figures for May 2026 found that input prices paid by UK manufacturers increased by 8.7% over the previous year, while factory gate selling prices increased by only 4%, squeezing manufacturers’ margins. The largest annual increases included crude oil inputs at 71.8%, reflecting wider global energy market movements, along with metal and non-metallic minerals at 6.8% and chemicals at 5.6%.
John Carter, Managing Director of British Business Funding, commented: “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.”
Small businesses form a substantial part of the UK economy and employment base, and sustained cost increases across tax, energy, wages, and materials can limit their ability to hire, invest, or expand, even when underlying demand remains reasonable. Early cost reviews and careful financial planning remain practical steps for many firms as they manage the current environment.