Labour came to power promising growth after fourteen years of Tory stagnation. But as it sets out to revive the UK economy, its relationship with small businesses—a key engine of job creation and innovation—faces early challenges.
From tax reform and wage legislation to access to finance and support services, Labour’s early moves have had a significant, although mixed impact on small businesses. Turning this relationship into a productive partnership could shape the UK economy and Labour’s prospects at the next election.
Labour’s commitment to a “fair deal” for workers has resulted in swift yet controversial changes to employment regulations and wages. The National Living Wage has been increased to £12.21 per hour, while employers’ National Insurance Contributions (NICs) have risen from 13.8% to 15% and small employers’ benefit from an increased Employment Allowance
SMEs, particularly those in hospitality, retail, and care are already struggling to absorb the additional cost of labour. And these cost increases come at a time when many small businesses are still recovering from post-COVID debt and adjusting to supply chain pressures. Industry groups have warned that more than 50,000 small firms could be at risk of closure this year, with rising wage bills cited as a major cause. Rising wages would not be a problem if consumers were spending more in those businesses but that is not happening because there is a cost-of-living challenge. While the Labour government frames these moves as lifting living standards and restoring fairness to the labour market, the reality for many employers is that job creation has slowed, hiring plans are on hold, and staffing levels are being reassessed.
Where Labour has won praise from small business advocates is in its tough new stance on late payments. Under reforms introduced in July, large firms are now legally required to publish detailed payment practices, and face sanctions if they fail to pay smaller suppliers on time. Fines, interest charges, and enhanced scrutiny from audit committees form part of this new accountability regime. For SMEs, this crackdown is long overdue. Late payments are a chronic issue, costing the UK economy billions in lost productivity each year and putting unnecessary strain on small firms’ cash flow. By empowering the Small Business Commissioner and placing the onus on large corporations to act fairly, Labour is helping to level the playing field, and this should help SMEs with cashflow.
To drive long-term growth, small businesses need access to affordable finance. Labour has begun addressing this by expanding the British Business Bank’s remit, injecting £1 billion in new capital for start-ups, scale-ups, and innovation. Plans for a new National Wealth Fund and the launch of a streamlined Business Growth Service are also in motion. These developments, if delivered well, could help fill gaps in regional finance and offer a counterweight to traditional banks’ cautious lending. But the challenge lies in execution. Small businesses often lack the time, knowledge, or administrative support to navigate complex funding schemes. Simplifying access and improving local delivery will be key.
The Employment Rights Bill, spearheaded by Angela Rayner, promises significant reforms: a ban on zero-hours contracts, day-one rights to sick pay and parental leave, and expanded collective bargaining protections. For workers, these changes are empowering and in keeping with Labours traditional position of supporting workers. For employers however, especially those with fewer than 10 staff, they represent a growing administrative and legal burden. Tribunal cases are expected to rise, with the Ministry of Justice already planning a major expansion of employment tribunal staff. Unless Labour provides support to small firms navigating these changes, there is a risk that well-intentioned reforms could create costly compliance hurdles and drive risk-averse hiring, ultimately damaging SMEs.
Perhaps the most eagerly awaited policy among high-street businesses is Labour’s promise to reform business rates. The current system, long criticised for its disproportionate impact on bricks-and-mortar shops versus online retailers, is due to be replaced. However, no detailed proposal has yet been released. For small retailers and service providers, rates reform is not just welcome, it is essential. Combined with rising wage costs and energy bills, rates continue to erode margins and make town centre trading increasingly unsustainable. Some campaign groups have warned that for small independent retailers, while a win on business rates would be hugely welcome it could be cancelled out by the introduction of more regulations such as new restrictions on vapes. In a sector where margins are tight and regulatory burdens are high; it is important for the government to have a whole government approach to changes.
Labour’s credibility with local business could hinge on its ability to deliver a fairer system swiftly. Also, high streets are what local people talk about. In a similar vein to Morgan McSweeney’s war on potholes, a decaying high street with boarded up shops is a powerful image that Labour must reverse if it is to physically show residents it can deliver change.
Labour’s business plan includes positive steps around training and productivity. The Help to Grow programme, offers management training and mentoring for SMEs and has already reached over 10,000 firms. Meanwhile, the forthcoming Skills England body aims to align vocational training more closely with regional business needs. By improving access to high-quality training, Labour is helping small businesses modernise, digitise, and scale. This support needs to be backed by sustained investment and real partnerships with local chambers, enterprise networks, and industry bodies to have meaningful long-term impact, and as soon as possible tax incentives to invest.
For Labour’s relationship with SMEs to mature, the government must strike a careful balance between social responsibility and economic realism. That means:
- Providing phased relief from rising employment costs, especially for the smallest employers.
- Delivering business rates reform with urgency to protect high streets and reducing general business taxation
- Ensuring access to finance through the British Business Bank is simple, local, and equitable.
- Supporting compliance with new worker protections through education, templates, and low-cost legal resources.
- Expanding procurement opportunities for small businesses via public contracts, especially in green industries and infrastructure.
Labour has shown a clear desire to be a government for growth, but it must ensure small businesses aren’t treated as passive vehicles for delivering social policy. Instead, they should be empowered as partners in innovation, job creation, and local prosperity. If Labour can reduce regulatory friction, improve support delivery, and show that it understands the realities of running a small business in 2025 including reducing business taxes, it stands to gain not just economic dividends but political loyalty. If it fails, it risks fuelling disillusionment among Britain’s entrepreneurial base and weakening the foundations of its long-term growth strategy.
