How UK small businesses can protect margins as business rates, taxes and costs rise

UK businesses are entering one of the toughest trading periods in over a decade. Rising business taxes, higher business rates, and slowing economic growth are squeezing margins across almost every sector, from retail and hospitality to manufacturing and professional services. Forecasts suggest growth will soften further into 2026, while business overhead costs continue to rise, prompting many firms to rethink investment plans and explore practical ways to remain profitable.

With government support becoming less predictable, companies are focusing on what they can control: cutting operational costs, modernising financial systems, and improving cash-flow efficiency. From optimising payment processing and recurring billing to expanding online sales, the most resilient businesses are those leveraging technology to offset rising business costs.

This guide explores how increases in business taxes and business rates are affecting UK firms and looks at practical solutions such as smarter payment infrastructure, open banking, and Variable Recurring Payments (VRPs), to strengthen margins, boost efficiency, and support sustainable growth in the years ahead.

How rising business taxes, higher overheads and slower growth are impacting UK businesses

The latest UK business tax news 2025 paints a challenging picture for companies. Rising business taxes, increasing operating costs, and slowing economic growth are putting significant pressure on margins, leaving many firms reassessing investment plans and tightening spending.

Fresh analysis from the EY ITEM Club UK Growth Report 2025 forecasts that UK economic growth will slow from 1.5% this year to just 0.9% in 2026. At the same time, business investment is expected to drop sharply, from 3.7% in 2025 to only 0.8% by 2026. With a £30 billion fiscal shortfall, the likelihood of further tax rises and spending cuts is high, measures that directly influence profitability, hiring, and long-term planning for UK businesses.

Corporation tax rising to 25%, combined with higher National Insurance contributions and new levies, is weighing heavily on confidence. The Institute of Directors reports sentiment at record lows, prompting firms to shorten planning cycles, pause recruitment, or freeze discretionary spending. Economists describe the current climate as a “permacrisis” for UK businesses.

Yet the picture is not entirely bleak. The Barclays Business Prosperity Index shows that while 45% of firms believe tax cuts are essential, almost 90% still plan to increase investment next year. A similar proportion are adopting artificial intelligence and automation to reduce business overhead costs and improve efficiency, with 42% expecting to hire for AI-focused roles. This trend highlights a clear point: with government support uncertain, UK businesses are taking control of their own resilience by investing in technology, efficiency, and smarter financial models.

How rising business rates are squeezing UK retailers and small businesses

The rise in business rates across the UK is placing intense pressure on retailers, hospitality operators, and small businesses already grappling with inflation and slowing consumer demand. As temporary small business rates relief fades, bills are climbing sharply. After receiving a 75% discount during the pandemic, many firms saw relief drop to 40% earlier this year, leaving businesses facing effectively doubled rate bills.

How higher business rates are hitting the high street

The increases are stark across the board:

• Independent retailers: £3,751 → £9,003
  
• Restaurant operators: £5,563 → £13,351
  
• Nightclubs: £7,479 → £18,245

These increases are not minor adjustments. For many small shops, cafés, and hospitality venues, the rising business overhead costs now represent the line between staying open and shutting down.

The risk of widespread closures

The British Retail Consortium warns that the government’s proposed surcharge on properties valued over £500,000 could force up to 400 large stores to close, putting 100,000 jobs at risk. These anchor retailers play a crucial role in driving high-street footfall, meaning surrounding cafés, salons, pubs, and independent shops also suffer.

A rise in high street shop closures in the UK would accelerate the decline already seen in many town centres, compounded by online competition and weaker consumer confidence.

Tough choices for retailers under pressure

Faced with rising business rates, higher National Insurance contributions, new packaging taxes, and wider inflationary pressures, retailers must make difficult decisions:

• Raising prices, risking lower footfall
  
• Cutting staff, affecting service quality
  
• Reducing stock levels to free up cash
  
• Delaying investment or refurbishments

The cumulative effect on business costs is severe. Industry estimates suggest retailers were already absorbing an extra £7 billion in expenses before the latest business rates changes took effect, leaving margins stretched to breaking point.

Why UK business leaders are calling for tax cuts and smarter cost-saving solutions

Across the UK, business leaders are increasingly vocal about the need for tax relief. A recent Barclays survey shows that 45% of firms are calling for government tax cuts, highlighting that rising business costs, higher business rates, and sluggish growth are squeezing margins to breaking point. Yet many leaders recognise that relying solely on government action is no longer a viable strategy.

Instead, companies are accelerating investment in technology. The same research reveals that nearly 90% of UK organisations are already adopting AI, automation, and digital tools to increase efficiency and reduce business overhead costs independently. This marks a strategic shift: rather than waiting for tax changes, firms are modernising systems to protect profitability.

AI adoption rises as firms seek smarter ways to reduce costs

The rise of artificial intelligence is reshaping hiring and investment priorities:

• 42% of businesses are recruiting for AI-specific roles
  
• 20% are creating entirely new AI-focused positions
  
• 70% of leaders believe rapid AI adoption could help the UK become a global leader in AI capability

The message is clear: if business tax rates in the UK remain high, companies will increasingly turn to technology that boosts productivity, automates manual work, and protects margins, without relying on redundancies or major structural cuts.

A missed opportunity: Reducing payment processing fees

While high-profile digital transformation grabs headlines, one of the fastest, most reliable cost-saving strategies for UK SMEs is often overlooked: optimising payment processing.

Many retailers and small businesses pay around 2% per card transaction. By switching to modern payment infrastructure, including Open Banking payments, fees can drop to roughly 0.5%.

For retailers handling hundreds of thousands of pounds in transactions each month, this can deliver:

• Thousands of pounds saved every quarter
  
• Stronger year-on-year margin protection
  
• Lower costs without cutting staff or raising prices

In an environment where every percentage point counts, revisiting payment processing remains one of the most practical ways for UK businesses to reduce business costs and strengthen resilience.

How open banking reduces payment processing costs for UK businesses

Open banking payments in the UK are transforming how businesses manage transactions. Rather than routing payments through card networks such as Visa or Mastercard, open banking enables secure, direct bank-to-bank transfers using regulated APIs. For customers, the experience is seamless, but for merchants, the financial benefits are substantial.

Why open banking costs less than traditional card payments

Card processing fees remain one of the biggest hidden business costs for UK companies. Once authorisation fees, gateway charges, PCI compliance, and terminal rental are added, typical charges reach 1.5% to 3% per transaction.

By contrast, open banking usually operates at a fraction of the cost, often below 1%, depending on the provider. For a business processing £100,000 per month in card payments, even moving part of that volume to open banking can save thousands of pounds annually.

A real-world example:

A car dealership in Cambridge now processes 96% of its transactions through Pay by Bank. By bypassing card schemes, the business saves more than £6,000 a month in fees alone.

Faster settlement and stronger cash flow

Open banking also accelerates cash flow. Research from GoCardless shows that payments are:

• 48% faster to settle
  
• 35% less prone to fraud than card transactions

Faster settlement reduces borrowing needs and provides businesses with clearer, real-time visibility of incoming revenue.

Improved customer experience with Pay by Bank

Pay by Bank is increasingly expected at checkout, particularly among mobile-first and younger shoppers. Customers benefit from:

• No card fees
  
• No risk of expired or stolen cards
  
• Instant confirmation via their bank app

For merchants, fewer failed payments and smoother high-value transactions improve reliability and customer satisfaction.

Operational savings through automation

The advantages of open banking extend beyond transaction fees. NatWest reports that UK businesses can save up to 150 hours per year by automating back-office tasks.

When payment data feeds directly into accounting tools such as Xero or QuickBooks, businesses gain:

• Automatic payment-to-invoice matching
  
• Reduced manual reconciliation
  
• Fewer errors and less time chasing unmatched payments
  
• Real-time financial visibility

Teams previously tied up fixing discrepancies can now focus on revenue-generating activities.

Flexible adoption through trusted providers

Leading UK open banking providers, such as Wonderful, offer simple onboarding and flexible integration. Many firms introduce open banking gradually, adding Pay by Bank alongside card payments until customer uptake grows.

This phased approach reduces disruption, allows early cost savings to be measured, and gives businesses confidence before shifting more volume away from traditional card networks.

Variable recurring payments: How VRPs improve recurring revenue and cash flow

Variable Recurring Payments (VRPs) represent one of the most significant upgrades to the UK’s payment infrastructure in recent years. The first phase, which allows customers to move money between their own accounts (“sweeping”), is already live at major banks. A broader rollout for commercial VRPs, enabling automated payments between businesses and customers, is planned for the near future. Unlike traditional Direct Debits, VRPs allow authorised companies to collect payments of varying amounts without requiring customers to reconfirm each transaction.

How VRPs work and why they matter

VRPs operate within pre-agreed limits, giving businesses flexibility to adjust charges based on usage, renewals, tier changes, or consumption. This makes VRPs particularly suitable for:

• Subscription models
  
• Gyms and fitness centres
  
• Software-as-a-service (SaaS) billing
  
• Utilities and metered services
  
• Memberships and loyalty programmes

Because payments move directly between customer bank accounts and the merchant, failed transactions drop significantly compared with card-on-file billing, where expired or replaced cards often interrupt recurring revenue.

Operational benefits for UK businesses

The operational impact is immediate and measurable:

• Fewer failed payments thanks to bank-level authentication
  
• Automatic reconciliation reduces manual accounting work
  
• More predictable cash flow, supporting better financial planning
  
• Lower administrative burden, freeing teams for customer-facing activities

Early adopters report a 15% to 20% increase in successful recurring collections compared with traditional card-based subscriptions, a vital improvement for sectors operating on tight margins.

Where VRPs fit into the FCA roadmap

The FCA’s phased rollout includes:

Phase 1: charity donations and utility payments

Phase 2: commercial and retail use cases

This gradual approach allows banks, regulators, and payment providers to standardise systems before VRPs become widely available across all businesses.

Building a future-ready recurring payments ecosystem

Many retailers, subscription-led businesses, and membership organisations are already combining VRPs with open banking for one-off transactions. This creates a unified, automated payment environment that simplifies operations and strengthens revenue continuity.

Industry providers such as TrueLayer, Yapily, and GoCardless are expanding VRP capabilities, giving UK businesses a practical pathway to automate billing, reduce failed payments, and streamline financial processes without adding overhead.

From high street to online: Cost-effective ways for UK retailers to expand into eCommerce

For retailers facing rising business rates and tighter margins, moving part of their operations online has become one of the most practical ways to reduce fixed costs and reach new customers. The economics have changed: running an eCommerce store no longer requires a large upfront investment or complex technical know-how, making digital expansion accessible to shops of all sizes.

Setting up an online store: Affordable choices for UK businesses

Most UK retailers compare platforms such as Shopify, WooCommerce, and BigCommerce when moving online:

Shopify: Plans start at £29 per month, rising to £319 for advanced features.

WooCommerce: Free to install, with hosting typically £5 to £30 per month and a domain around £10 per year.

BigCommerce: From roughly £30 per month, with unlimited bandwidth, product storage, and staff accounts.

Many of these platforms now support open banking payments. For example, several WooCommerce payment plugins enable merchants to offer Pay by Bank, letting customers pay directly from their bank account. This reduces transaction fees and creates a faster, smoother checkout experience.

Why going digital reduces financial pressure

Shifting part of a business online brings multiple structural benefits:

• Lower operational costs compared with maintaining multiple high street sites
  
• No extra utility bills or facility maintenance for additional sales volume
  
• More flexible staffing, particularly during seasonal peaks
  
• Reduced cost per transaction when combined with Pay by Bank options
  
• Improved access to customer data, trends, and inventory insights

Many independent retailers are now adopting a hybrid model: keeping a flagship store for footfall and brand presence, while driving the majority of transactions through a streamlined online shop with minimal overhead.

A low-risk digital transformation strategy

Small retailers don’t need to overhaul everything at once. A phased approach works best:

• Start with a simple online catalogue showcasing best-selling items
  
• Offer a mix of traditional card payments and lower-cost open banking options at checkout
  
• Introduce mobile POS systems or payment APIs to streamline online and in-store transactions
  
• Gradually expand product ranges and automate fulfilment as demand grows

This incremental strategy reduces risk, builds digital resilience, and helps retailers balance rising business rates with predictable, low-cost online revenue streams.

Building resilience: How UK businesses can save money and thrive in 2026

Across the UK, the businesses that have remained stable are those taking proactive steps to control costs, streamline operations, and rebuild margins, rather than waiting for government relief. A layered approach often delivers the strongest results, with each stage compounding the savings.

1. Reduce payment processing costs with open banking

Payment fees are among the most controllable business costs. Shifting even part of transactions from cards to open banking can immediately lower fees, typically from 1.5% to 3% down to a fraction of a per cent.

For a retailer generating £500,000 in annual turnover, this could mean £5,000 to £10,000 saved each year. Integration is straightforward, supported by modern payment APIs and UK payment gateways.

Time savings add up. Research from NatWest shows that open banking automation can remove up to 150 hours of manual reconciliation annually, freeing staff to focus on more valuable work.

2. Expand digitally to reduce physical overheads

For businesses squeezed by rising rents and business rates, moving even 20% of sales online can cut shopfront overheads by 20% to 30%.

Platforms like Shopify, WooCommerce, and BigCommerce cost just £25 to £30 per month, a fraction of physical property costs. Many now support open banking payments, allowing smoother checkout experiences while enabling merchants to retain more of every sale.

The strongest performers adopt a hybrid model: maintaining a physical presence for brand visibility, while shifting the bulk of transactions online, where business costs are lower and margins are stronger.

3. Automate key operational tasks

Automation is no longer optional for businesses operating under tight constraints. Integrating payment systems with accounting tools such as Xero, QuickBooks, or Sage reduces errors, speeds up reporting, and eliminates tedious manual reconciliation.

Variable Recurring Payments (VRPs) further streamline subscriptions, memberships, and usage-based billing. Payments adjust automatically within agreed limits, lowering failure rates and reducing administrative work.

For smaller businesses, these efficiencies free teams to concentrate on service, sales, and customer retention rather than routine back-office tasks.

The compound impact

Combining lower-cost payments, digital expansion, and automation typically delivers a 5% to 8% improvement in margins. In a high-tax, high-cost environment, this lift can determine whether a business stabilises or declines.

Adoption is accelerating. Open Banking Limited reports that 75% of UK businesses now use open banking, with 93% expecting growth in usage over the next five years. Early adopters are building lasting competitive advantages that extend beyond immediate economic pressures.

The path ahead: What UK businesses can expect in 2026

The pressures facing SMEs are set to intensify following the latest fiscal announcements. As outlined in UK Autumn Budget 2025: What it means for businesses and key sectors, rising taxes, shifting sector priorities and tighter cost structures will shape how small firms plan for 2026, making cost-efficiency and smarter financial infrastructure more important than ever.

The UK economy faces persistent challenges: higher business taxes, rising business rates, and sluggish growth are unlikely to ease quickly. Yet businesses that act decisively can rebuild resilience and regain momentum.

Top-performing operators focus on what is within their control:

• Reducing payment friction and processing costs
  
• Shifting sales to lower-cost digital channels
  
• Automating financial and operational workflows

A Payments Association survey of 500 UK SMEs shows that open banking is valued for improved customer experience (58%) and lower fees (51%), highlighting a clear shift in priorities.

Digital transformation and smarter payment infrastructure are no longer long-term aspirations; they are essential tools for protecting margins now and strengthening competitiveness into 2026 and beyond.

FAQ

Why are UK business taxes and rates increasing?

Business taxes and business rates are rising due to inflation, higher public spending, and revenue targets, pressuring cash flow and making cost-saving solutions critical for UK businesses.

How are rising business rates affecting UK retailers?

Higher business rates raise operating costs, squeezing margins. Many retailers are downsizing, shifting sales online, or using cheaper payment methods to remain profitable.

How do rising taxes impact small businesses in the UK?

Small firms face tighter margins as UK business tax rates increase, slowing growth and prompting adoption of digital payments, automation, and eCommerce to offset higher business costs.

Why are UK business leaders calling for tax cuts?

High taxes limit investment, hiring, and expansion. Leaders argue that reducing tax burdens and adopting tech like automation and open banking strengthens resilience and productivity.

How can open banking help UK businesses cut costs?

Open banking reduces transaction fees, speeds settlements, and cuts failed payments. Businesses lower business costs, improve cash flow, and gain more predictable revenue.

What are Variable Recurring Payments (VRPs)?

VRPs allow automated, flexible payments via open banking, lowering failure rates, improving cash flow, and offering a cheaper alternative to Direct Debits or card subscriptions.

How do modern payment solutions reduce business costs?

Digital and open banking payments cost less than cards and settle faster, cutting hidden fees, lowering business overheads, and giving firms more predictable revenue for planning.

Why are more UK retailers moving online?

Online selling reduces rent and rates, expands reach, and lowers transaction costs. Combining eCommerce with open banking helps retailers stay competitive and manage business costs.

What is the most cost-effective way for UK businesses to start selling online?

Low-cost eCommerce platforms with integrated open banking allow businesses to sell with minimal upfront investment and reduced transaction fees.

How can UK businesses stay resilient as taxes rise?

Cutting payment fees, automating billing, reducing overheads, and expanding online helps protect margins, improve cash flow, and support long-term business stability.