UK small business sales growth slowed to a two-year low in the first quarter of 2026, according to Xero's latest Small Business Insights data, pointing to weaker trading conditions across much of the sector.
Sales rose 2.9% year on year in the March quarter, based on anonymised, aggregated data from 440,000 UK small businesses using Xero. That was down from 5.2% in the December quarter, marking a softer start to the year for smaller firms.
The slowdown was most visible early in the quarter. Sales growth was 1.4% in January and 2.4% in February, then improved to 5.0% in March, still below the long-term average of 8.5%.
Consumer pressure
Businesses tied to discretionary spending were among the weakest performers. Retail sales growth was 0.5% year on year in the March quarter, while hospitality recorded 1.4%.
Other parts of the economy held up better. Professional services posted sales growth of 4.7%, while healthcare and manufacturing each recorded 4.6%.
Xero linked some of the pressure on smaller firms to strained consumer demand. It also noted that the latest inflation data showed consumer prices rose 0.7% month on month in March, while petrol prices increased 2.4% over the same period.
For some operators, seasonal weakness added to tougher trading conditions. "January and February are typically more challenging months for us, and this year the persistent wet weather made trading conditions even tougher," said Scott Peacock, director of Stables Coffee Co.
"Despite that, we've seen steady demand overall and have performed better than expected so far this year. Like many small businesses, we've had to make some adjustments in recent months, including putting our prices up in response to increases in the minimum wage and other rising costs. Looking ahead, we know it's still a difficult environment, with protecting cash flow and managing margins being key, but we're in a good place to adapt and feel cautiously optimistic about the months ahead."
Jobs and pay
Employment growth showed some recovery, though it remained below long-term norms. Small business jobs rose 2.1% year on year in the March quarter, up from 1.6% in the previous quarter.
Retail maintained hiring momentum after the festive period, with job growth of 3.3%. Construction recorded 3.1% and real estate services 3.0%, suggesting labour demand remained firmer in some areas despite the broader slowdown in sales.
Wage growth also edged higher. Small business wages increased 2.9% year on year in the March quarter, from 2.7% in the December quarter.
Hospitality stood out for a different reason. The sector recorded the strongest wage growth at 3.7%, but higher pay did not translate into stronger hiring or sales, underlining ongoing difficulties in attracting staff and lifting revenue.
Kate Hayward, Xero's UK Managing Director, said many owners were responding cautiously to cost pressures and uncertain demand.
"There are challenging months ahead for small businesses."
"Margins are squeezed by energy and finance costs, and owners are naturally responding with caution. This is encouraging more 'wait and see' behaviours, where they delay hiring or expansion, stall investment in new premises or equipment, and favour casual work over permanent hires. The government must step up and really listen to small businesses, who don't feel heard," said Hayward.
Payments stable
Payment performance was one of the few areas to remain steady. Small businesses were paid in an average of 29.0 days in the March quarter, little changed from 29.1 days in the previous quarter.
Late payments also showed limited movement. Invoices were paid 8.2 days late on average, compared with 8.1 days in the December quarter.
That relative stability may offer some support to cash flow, as many owners contend with weaker sales growth, rising costs, and hesitation over investment and recruitment.
Overall, the figures point to a mixed picture for the UK small-business economy: some recovery in employment and wages, but slower sales growth in customer-facing sectors and continued caution among owners regarding hiring, expansion, and spending.