Overview of 2025 and Outlook for 2026
As 2025 draws to a close, the Chancellor’s November Statement has been absorbed by the market, and attention has shifted to the operational realities facing UK businesses in 2026. For SMEs, the most valuable asset this winter is not seasonal demand but clarity on economic conditions, regulatory changes, and consumer behaviour in the year ahead.
Interest Rates: Signs of Gradual Easing
The Bank of England’s August decision to reduce the base rate to 4% provided moderate relief to borrowers, although the cost of capital remains significantly higher than pre-inflationary levels.
Current market expectations indicate a high likelihood (92%) of a further reduction to 3.75% at the next Monetary Policy Committee meeting.
For businesses considering refinancing, expansion, or restructuring existing borrowing, any subsequent easing of rates will be relevant, but inflation, still at 3.8%, continues to restrict more rapid monetary loosening.
Retail and Hospitality: Divergent Performance
Recent analysis from AlixPartners highlights contrasting consumer behaviours in Q4:
Clothing sales are expected to increase by approximately 4%.
Food and grocery spending is projected to remain broadly flat.
The data suggests that consumers are prioritising discretionary purchases selectively while closely assessing value. This shift supports the continued rise of omnichannel retail expectations, where customers research online and purchase through whichever channel offers convenience and transparency.
For SMEs in retail and hospitality, strong digital visibility and an integrated customer experience remain essential to converting interest into sales.
Employment Law: Significant Changes from April 2026
The most substantial non-financial development affecting small businesses in the coming year is the implementation of new employment protections, including:
Day One rights for statutory sick pay
Day One rights for unfair dismissal
Restrictions on exploitative zero-hours contracts
These changes will require many SMEs to revise contracts, update policies, formalise procedures, and ensure HR documentation is compliant. Businesses that have historically relied on informal practices will need to introduce more structured processes to manage employment relationships and mitigate legal risk.
Business Stability: Elevated Pressure but Ongoing Resilience
Insolvency figures for late 2025 show continued pressure on sectors such as construction and hospitality, where increased wage costs and persistent input inflation are disproportionately felt.
While overall levels remain elevated, the rate of new business formation continues to offset some closures. This indicates that although trading conditions are challenging, entrepreneurial activity remains strong, and business turnover continues to drive economic renewal.
Outlook for 2026
The outlook entering the new year is one of measured optimism. Borrowing costs are likely to fall modestly, consumer spending remains active but highly selective, and regulatory changes will require operational preparation. SMEs that improve financial planning, strengthen HR processes, and maintain agile customer engagement are well-placed to navigate the year ahead.
Summary for the Busy Director
Interest Rates: Currently 4%; a potential reduction to 3.75% is widely expected.
Retail Trends: Clothing demand is increasing; food expenditure remains static.
Employment Law: Significant changes from April 2026 (Day One rights, zero-hours contract reform).
Economic Climate: Inflation remains higher than anticipated (3.8%); borrowing costs remain material.
Want help with planning for 2026?
At ATN Partnership, we have helped thousands of clients with planning their financial affairs. If you want assistance getting to grips with all the changes and to plan for growth and success in 2026, get in touch. You can contact our Client Managers for further information and professional advice.