The UK’s small businesses should be fuelling the country’s growth – here’s why that’s not happening
The UK government’s spending review has set out its priorities for the next three years. But behind the rhetoric about boosting growth lies growing concern about small businesses being locked out of the wider UK economy. Government funding and regulation are increasingly out of step with the reality of micro-enterprises and sole traders, shutting off their potential to boost GDP growth.
These businesses already punch above their weight, accounting for 60% of private-sector employment and more than half of total business turnover. Yet while recent budgets have pushed up costs through higher employer national insurance (NI) contributions and minimum wage rises, little meaningful relief has been offered in return.
As a result, a recent British Chambers of Commerce survey found that 82% of businesses expect the NI hike to damage their business. More than half say it will affect recruitment plans, prices and day-to-day operations.
Working with small businesses, apprentices and local enterprise leaders, we have seen how government support schemes often fail to reach those who need them most. Our research into informal work and legitimacy shows that many micro-businesses (ten employees or fewer) and sole traders operate in a space where regulatory demands feel misaligned with their economic reality.
Across the UK, many micro-businesses already operate on a thin margin. For some, formal compliance with tax, labour and reporting obligations is simply out of reach. This is not due to unwillingness, but rather to a lack of manpower and time. In short, it is not about criminality, but survival.
And when formality becomes unviable, the government loses out too through reduced tax receipts, lower NI contributions and missed opportunities for growth.
In our research, we’ve found that formal and informal business owners don’t reject regulation outright. They reject complex systems that demand compliance without offering security. When the risks of being “seen” by the taxman outweigh the benefits, informality becomes a rational, even morally justifiable, choice.
Informality is a significant global issue. According to the 2025 report by the International Labour Organization, even in high-income countries like the UK around one in ten workers are informally employed. And more than 60% of these people are working within formal enterprises, typically as undeclared workers.
Informal work is most common in service and construction industries, and despite high education levels, nearly one in four informal workers lives below the poverty line. This compares to just 14% of formal workers.
Barriers to growth
In the UK, regulatory structures can make matters worse. The VAT threshold, recently raised to £90,000, may appear generous. But it can act as a cliff edge, discouraging small businesses from growing.
Evidence from the International Monetary Fund shows that firms often intentionally limit turnover to avoid registration. Compliance costs and administrative burdens create a clear disincentive to scaling up.
The slowdown is measurable. Small businesses reduce growth by up to 25% as they near the threshold, with no rebound in performance post-registration. This suggests a structural effect rather than temporary caution. Around one in five firms reports actively avoiding VAT registration by turning down work or restructuring operations. It’s a clear sign that the system discourages formal expansion.
These structural barriers don’t end with taxation. Even when support schemes are well designed and effective on paper, many small firms find themselves excluded by eligibility criteria or overwhelmed by the administrative requirements. For example, the Help to Grow: Management programme has delivered clear value, equipping thousands of SME (small and medium-sized enterprises) with vital skills in strategy, finance and innovation.
However, it is limited to businesses with five or more employees. This excludes sole traders, some micro-businesses and early-stage entrepreneurs, among others. These smaller firms, often operating informally or semi-formally, are arguably those most in need of accessible, flexible support. By overlooking them, even well-intentioned programmes risk reinforcing the gaps they aim to close.
- Written by Danny Buckley (Workplace Learning Director, Loughborough University); Natalia Vershinina (Professor of Entrepreneurship, Audencia); and Peter Rodgers (Professor of Strategy and International Management, University of Southampton).
- This article first appeared on The Conversation. You can read the original here.
