SME confidence in UK economy falls sharply ahead of 2026

Small business optimism in the UK economy has dropped significantly going into 2026, even as most SMEs expect their own revenues to grow, according to new figures from lender iwoca.

The firm’s annual SME Outlook survey, based on responses from 1,005 small business leaders, shows that only 38% are optimistic about the UK’s economic direction – a steep fall from 51% a year earlier.

Rising day-to-day operating costs remain the biggest concern for SMEs, cited by 47% of respondents. Economic uncertainty followed closely at 44%, while business leaders also pointed to higher business rates (34%) and interest rates (30%) as key pressures. Nearly two-thirds (64%) said they believe the government is “on the wrong track” for SMEs in 2026, and 62% feel the UK is losing ground internationally.

The downturn in confidence is influencing hiring intentions. Fewer than half of SMEs (45%) plan to increase headcount this year, down 10 percentage points since early 2025. The expansion of artificial intelligence in small businesses is also shaping workforce plans: two-thirds (66%) of leaders said they were excited about AI’s potential, but more than a quarter (26%) expect it to lead to job reductions over the next 12 months.

Despite the challenging backdrop, most SMEs remain positive about their own growth prospects. Seventy-two percent expect turnover to rise in 2026, broadly unchanged from last year, while just 9% anticipate declining revenues. Recent analysis by Capital Economics, commissioned by iwoca, suggests that SMEs receiving external finance can increase monthly revenues by an average of 19%.

“While they remain bullish about their own growth prospects, their faith in the UK’s wider economic direction is fracturing and this is already stifling hiring plans for 2026,” he said. He added that reducing cost burdens and improving access to finance would help unlock the “full potential” of the UK’s 5.6 million small businesses.