Government red tape stalls growth for almost 1 in 5 UK SMEs

New research from FreeAgent suggests bureaucracy is still biting down hard on the UK’s small business sector — with almost one in five SMEs (18%) citing government regulations as a key barrier to growth.

Despite repeated ministerial pledges to “cut red tape” and reduce burdens on enterprise, a significant portion of the UK’s small business community continues to struggle with compliance requirements and complex reporting obligations.

The survey, commissioned to explore the experiences of growing SMEs, highlights that half (50%) of respondents find business reporting a challenge, while a quarter (26%) say compliance issues actively hinder their ability to scale.

Confidence in the broader economic backdrop is also weak — with 46% of SMEs reporting little faith that growth opportunities will improve under the current government.

Funding fears and workforce worries

Beyond regulation, financial pressures are mounting. Cash flow concerns and difficulties in securing funding top the list of challenges for many.

Over half (52%) of businesses said they have required additional funding as they scale, while nearly a third (31%) struggle to meet payroll — a sign that day-to-day operations remain precarious for many.

Other challenges include managing rising costs (27%), improving profitability (31%), and adapting legacy systems.

Altogether, 96% of businesses reported having to adjust their financial management practices in response to these pressures — a near-universal signal of disruption.

Competition forces reinvention

The research also paints a picture of a competitive, saturated market environment. Over a third (34%) of businesses said increased competition was affecting their growth.

In response, some SMEs are expanding their service lines (28%), while nearly a quarter (24%) are considering a complete pivot in their business model.

In a sector known for resilience and innovation, the scale of these strategic shifts suggests that more support may be needed to navigate shifting economic conditions.

Where SMEs go for guidance

When asked where they turn for support, SMEs were as likely to name social media (12%) as they were to cite government resources (14%) or external consulting services (15%).

Industry groups and peer networks each attracted 17%, suggesting that many business owners are still navigating their challenges in relative isolation.

Roan Lavery, CEO and co-founder of FreeAgent, called for a more coordinated support effort across government and industry.

“SMEs are the backbone of the UK economy, yet our research shows they continue to battle significant barriers — from government red tape to mounting financial pressures — that threaten their ability to grow and thrive,” Lavery said.

“At a time of economic uncertainty and fierce competition, it’s more important than ever for the government, industry, and the wider business community to work together to cut unnecessary bureaucracy and provide SMEs with the practical, reliable support they need.”