UK small businesses ended 2025 with fading momentum, as a hoped-for festive sales boost failed to materialise and rising costs weighed on confidence, according to new data from Xero.

Figures from the latest Xero Small Business Insights, based on anonymised data from 440,000 UK small businesses, show sales rose 4.7 per cent year on year across 2025, slightly ahead of 2024’s 4.4 per cent increase. However, growth slowed sharply towards the end of the year. In the final quarter, sales rose just 3.2 per cent year on year — the weakest performance in 18 months.

The slowdown was accompanied by growing caution in the labour market. Jobs growth edged up to 1.7 per cent year on year in the December quarter, but remained well below the long-term average of 3.4 per cent. Wage growth also softened, easing to 2.7 per cent from 3.0 per cent in the previous quarter, suggesting businesses are limiting pay rises as they manage tighter margins.

Kate Hayward, UK managing director at Xero, said the year had ended on a subdued note. “After a steady start, small businesses finished 2025 feeling the pinch from rising costs and lower demand,” she said. “Many have paused hiring and investment while they wait for clearer economic signals. The Spring Statement is a key opportunity to restore confidence and ease pressure on the bottom line.”

High-street businesses were among the hardest hit. Retailers increased headcount at more than twice the national average in the December quarter, with jobs growth of 3.8 per cent, yet sales fell by 0.7 per cent year on year. Hospitality also faced a squeeze, with sales growth slowing sharply to 0.7 per cent from 5.1 per cent in the previous quarter, even as hourly wages rose 3.6 per cent.

By contrast, healthcare, professional services and construction recorded the strongest sales growth over the period, reflecting more resilient demand in non-discretionary and project-led sectors.

One bright spot for small firms has been cash flow. Payment times fell to an average of 29 days in the final quarter, the fastest since 2017, and have now remained below 30 days for 14 consecutive months.

Debbie Williams, co-owner of John Williams Heating Services in Chippenham, said faster payments were helping offset softer demand. “Customers are spending cautiously but paying more quickly,” she said. “That makes a real difference for a family-run business like ours. We’re realistic about the challenges ahead, but cautiously optimistic about sustaining growth in 2026.”

The data suggests that while small businesses remain resilient, many are entering 2026 in wait-and-see mode, with policy decisions now central to whether confidence returns.