Sage data shows UK SMEs grow profits but slash investment

UK small and medium-sized businesses recorded higher revenues and profits in the year to end-2025, although hiring and investment remained subdued, according to a new dataset drawn from Sage accounting and payroll records.

The first Sage SME Pulse, based on anonymised data from more than 350,000 Sage customers, found real revenues rose 3.3% year on year in the fourth quarter of 2025. Profits increased 6.2% over the year, reaching their highest level since the first quarter of 2022. Headcount was largely unchanged, up 0.2% year on year in February 2026.

The results suggest smaller firms stayed resilient despite weak confidence and economic uncertainty. Over the same period, the Office for National Statistics reported UK economic growth of 1.0% year on year, providing a lower benchmark than SME revenue growth.

Domestic conditions have begun to stabilise, with interest rates falling and no new taxes announced in the Spring Statement. However, global uncertainty has continued to complicate planning for business owners.

Steve Hare, Sage's Chief Executive, described the outlook as one of continued caution. "The message for 2026 is cautious momentum. Hiring is close to flat, but now is the time to rebuild productivity and resilience," he said.

He said the year ahead would be shaped by borrowing costs, labour pressures and the adoption of new tools. "The year ahead will depend on lower finance costs, easing labour pressures, and making the most of AI to improve productivity," Hare added.

Profits and costs

The figures show profitability improved as revenue growth outpaced spending. Real expenditure rose 2.1% in the year to the fourth quarter of 2025, down from 4.5% in the previous quarter. The Pulse linked tight cost control to productivity gains, although it also recorded a fall in measured productivity in late 2025.

Average productivity, measured as real revenue per employee, fell 2.6% in the fourth quarter. Median gross earnings rose 5.3% year on year in January, down from 7.7% a year earlier, pointing to moderating wage growth.

Labour market caution remained a consistent theme. Headcount rose 0.2% year on year in February 2026, compared with a 0.1% decline in November. Firms continued to face high labour costs and uncertainty about demand.

Investment slowdown

One of the sharpest signals in the Pulse was capital expenditure. Capital spending fell 17.4% year on year, the 17th consecutive quarterly decline, according to the dataset. The figures suggest many businesses continued to prioritise cash preservation and operational flexibility.

SMEs also faced near-term cost pressures. The Pulse noted labour market strain ahead of April's National Minimum Wage rise. It also cited lower inflation and falling interest rates as sources of relief, potentially easing both input costs and financing conditions.

Workforce shifts

The data also pointed to changes in the composition of the SME workforce. Over-65s made up 5.1% of SME employees, up from 1.8% in 2022. Employment among under-18s fell over the same period, although the Pulse did not provide a comparable share for younger workers.

For many employers, the combination of slower wage growth, tight hiring and weaker productivity creates a difficult management challenge. Firms need output growth without a significant rise in payroll costs, while also navigating a changing age profile in the workforce.

Regional differences

The Pulse reported marked regional variation in earnings, headcount and profitability. Wales recorded the fastest median earnings growth at 6.4%, while London had the lowest at 3.8%, against a national median of 5.3% in January.

Headcount rose 0.6% in both Wales and the South East. London and the North East both recorded falls of 0.4%.

Profitability growth was strongest in the Midlands. The East Midlands recorded a 15.7% rise, while the West Midlands posted 10.8%.

Sector patterns

Sector-level findings pointed to uneven trading conditions. Utilities had the highest concentration of scale-ups, which Sage linked to investment tied to the energy transition. Health and social care followed, which the Pulse associated with the UK's ageing population. Hospitality showed signs of consolidation, with larger firms gaining share in a tougher cost environment.

Pay grew fastest in information and communication at 7.7%. Public administration and defence recorded the strongest hiring growth at 4.2%. Education revenues rose 12.4%, while accommodation and food services recorded a 0.1% decline.

Policy calls

Sage set out several measures for policymakers, including improved tax relief for digital and AI tools that raise productivity. It highlighted the Government's AI Skills Boost and called for stronger support, with a target of reaching 10 million workers by 2030. It also urged more support for entrepreneurship through education and advice, and simpler, more digital tax compliance for start-ups.

The SME Pulse combines two sources: the SMB Quarterly Tracker, covering 145,000 firms and aggregated and cleaned by Smart Data Foundry, with deflation and analysis by Cebr; and a Monthly Payroll Pulse. The dataset is filtered using £1 million monthly and £1.1 million annual payroll thresholds.

"The SMEs that protect cash flow while investing carefully in skills, retention and technology will be best placed for recovery," Hare said.