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Sales growth and hiring among UK small businesses slowed again in the three months to June, marking a third consecutive quarterly slowdown in sales growth.
Data from 440,000 UK small businesses using Xero showed year-on-year sales growth eased to 3.6% in the June quarter, down from 4.2% in the March quarter and 5.5% in the December quarter. That left growth well below the historical average of 8.5%.
Employment growth also weakened. Jobs growth slowed to 1.7% year on year in the June quarter from 2.4% in the previous quarter, the slowest pace since the December quarter of 2025.
Higher fuel prices and continued economic uncertainty weighed on confidence, while pressure on household budgets and discretionary spending hit demand. The data suggested many small businesses remained cautious on hiring and investment.
Sector split
Performance varied sharply across industries. Hospitality posted a 0.5% decline in sales from a year earlier, while retail grew 2.0% and arts and recreation rose 3.2%, leaving them among the weaker performers despite warm weather in June.
Agriculture, newly added to the dataset, recorded the weakest result, with sales down 8.6% year on year. Prolonged dry conditions and concerns over wheat quality added pressure on the sector.
Elsewhere, construction remained slightly ahead of the national average with sales growth of 4.6%. Transport and logistics was the strongest sector for sales growth at 8.2%, which Xero linked to higher freight prices driven by fuel costs.
Employment data showed a different mix of winners and losers. Healthcare recorded the strongest jobs growth at 3.8% year on year, followed by real estate services and retail, both at 3.5%.
Hospitality and information, media and communications both shed staff compared with a year earlier. Hospitality employment fell 0.7%, while information, media and communications was down 0.2%.
Cash flow strain
The report also indicated some deterioration in payment discipline. The average time small businesses waited to be paid after issuing an invoice edged up to 29.1 days in the June quarter from 28.8 days in the March quarter.
Businesses were paid an average of 8.3 days late, compared with 8.0 days in the previous quarter. While payment times remained close to recent averages, the increase suggested some businesses were holding on to cash for longer.
That matters for smaller firms because delayed payments can quickly tighten day-to-day finances. With sales growth slowing and hiring becoming more subdued, any additional pressure on cash flow can make it harder to cover wages, stock and other operating costs.
Small business wages rose 2.8% year on year in the June quarter and have remained around 3% growth for more than a year, the data showed.
Kate Hayward, UK Managing Director at Xero, said the latest figures should sharpen attention on the health of the small business economy.
"Things aren't improving for our small business economy, which should be a real wake-up call for the new Labour government. Even the warmer weather in June hasn't given our retail and hospitality sectors the boost they so desperately needed. We're seeing businesses holding back on hiring and growth, and all of this pressure is being compounded by payment times creeping up and rising fuel costs. It's not sustainable. The Autumn Budget is shaping up to be a real test for the new government to show they are listening and backing their pro-small business rhetoric. We need policies that restore small business confidence, improve cash flow and create the conditions to invest, hire and grow. We'll be continuing to push for this," said Kate Hayward, UK managing director at Xero.
A hospitality operator echoed the pressure shown in the data.
"Staff costs and the cost of goods have never been higher for our three businesses, so we're constantly weighing up whether to reduce our team and the quality of what we sell, or hold our nerve and hope conditions improve. For now, we're holding steady. We've watched well-established businesses close this year, but we've managed to open two new sites and have taken on a lease to renovate a third site. We're really depending on a strong summer to fund this," said Kyle Hyams, Owner of Orlas Coffee & Gelato and Aoifes Gelato.
"We provide income to 50 people employed across our businesses, but the support for businesses that are improving their communities isn't there. We'd love to see some control on food prices, a cut in VAT for hospitality, and grants or government-backed loans would make a real difference right now," Hyams added.