Labour’s hike to the minimum wage, alongside the surging cost of employment, has left over a third of small business owners almost unable to pay themselves a living wage, data from The Federation of Small Businesses (FSB) finds.
Entrepreneurship is often sold as a route to financial freedom, but the FSB is warning that many small business owners are having to make difficult financial trade-offs just to keep their doors open – including cuts to their salary, pension fund, and hiring plans.
The findings, submitted as part of evidence to the Low Pay Commission (LPC), paint a stark picture of an entrepreneurial class being squeezed from every direction. So, what hope do small business owners have of the dial moving in the future?
Rising employment costs are leaving business owners with little for themselves
The FSB is arguing that rising employment costs are becoming a “major structural issue within small firms”.
As reported by The Telegraph, they express that the “costs of employment, including the national living wage, employer National Insurance contributions, and auto-enrolment, make it harder for a small business owner to make sufficient profit to pay themselves a living wage – let alone to fund a pension”.
This is borne out by the FSB’s 2025 submission to the Low Pay Commission, which revealed that 36% of small business owners generated less than £25,000 in gross profit over the past year. This is barely more than the £22,200 salary of a full-time worker on the National Living Wage.
What’s more, with many owners working far longer than that, often 50 or 60-hour weeks, the hourly return on their labour can fall well below the minimum wage that they’re legally obliged to pay their staff.
With Labour also recently increasing the minimum wage for 18 to 20-year-olds to £10.85 per hour, and the apprenticeship wage for under 18-year-olds to £8 per hour, some experts believe this could make it harder for small businesses to expand by hiring younger staff members.
The Institute of Directors (IoD) also warns the LPC that this manifesto pledge could contribute to the recent surge in youth unemployment by removing the incentive for businesses to hire more inexperienced workers.
Taken together, these findings point to a tough environment for anyone considering starting or running a small business right now, but could this change when Keir Starmer steps down from power?
What changes could be brought under a new Labour Government?
As Keir Starmer gears up to leave Downing Street and Andy Burnham emerges as the clear frontrunner to become the UK’s next Prime Minister, small business owners may be watching closely for signs of relief.
Burnham has been a longstanding critic of the employer National Insurance rise introduced in Labour’s first budget, telling BBC Newsnight that he thought the “weight of the burden… wasn’t the right decision”.
He also has pledged to cut business rates for pubs by 20%, and raise the threshold at which other small, independent shops and hospitality businesses start paying rates, to take some pressure off business owners and support the high street.
However, it’s not all good news for employers. Burnham has recently expressed backing for banning zero-hour contracts, and has previously supported expanding the full adult minimum wage to 18 to 20-year-olds in his 2015 bid when he was a member of Labour’s shadow cabinet. While these changes are meant to help tackle job insecurity, both policies could pile further costs onto small firms.
For now, Burnham is appearing to walk the tightrope between supporting small businesses and staying loyal to Labour’s pro-worker agenda. Whether it’s enough to make life easier for struggling entrepreneurs remains to be seen.
