The UK small business report - the small business ecosystem and trends

min read

Written by Lucy Hancock

The UK small business report - the small business ecosystem and trends

What is the definition of a small business?

As for a small business definition, typically speaking a small business is a corporation, sole proprietorship or partnership with a small number of employees and often a lower average annual revenue than larger businesses. According to the government, an SME is an organisation that has fewer than 250 employees and a turnover of less than €50 million, or a balance sheet total of less than €43 million.

How many small businesses are in the UK?

The UK certainly isn’t short of small businesses, in fact, SMEs account for 99.9% of the UK’s business population, with approximately 5.54 million registered SMEs on Companies House in 2023. It might be surprising to some that most businesses in the UK are very small, with 74% of registered SMEs running with no employees.

We’ve delved further into the latest data from Companies House, looking back over the last 10 years to evaluate how the business landscape has changed over time.

How has the business landscape changed over time?

We looked at both VAT registered and unregistered businesses to give a clearer picture of the landscape - before we dive into the data, we’ll explain the difference. You’ll need to register for VAT if your total VAT taxable turnover for the last 12 months was over £85,000, or if you expect your turnover to go over that amount in the next 30 days. If this applies to you, you can register for VAT online.

Of the 5,555,100 businesses on Companies House in 2023, there are 2,914,100 businesses (with 0 employees) not VAT registered, and 1,196,000 businesses (with 0 employees) VAT registered - seeing fewer small businesses with a VAT taxable turnover than not.

Since 2013, the UK has seen year-on-year increases in the number of businesses registered, almost every year, highlighting a growing business landscape. Only three of the past 10 years saw percentage decreases in the number of businesses vs the previous year - 2018, 2021 and 2022.

The dip experienced in 2018 appears relatively small at -0.5%, but equates to the UK being home to 27,000 fewer businesses. This is very likely due to the impact of the stock market index suffering its worst year in a decade, with a number of economic worries concerning investors, which hit companies with 1+ employees more than those with no employees.

The number of UK businesses in 2020 saw a year-on-year increase of 1.9% from 2019, with non-VAT registered companies with no employees seeing the biggest growth (2.6%), likely influenced by the Covid-19 pandemic which saw a spike in startups. One reason for this rise in entrepreneurship was due to an increasing demand for medical supplies during the pandemic, with June 2020 seeing a 400% month-on-month increase in the number of new startups offering ‘disinfecting services.’

2021 saw the biggest decline year-on-year, with 6.5% fewer businesses operating compared to 2020. The largest decrease was seen in the number of businesses with no employees, which weren’t VAT-registered - the businesses with smallest turnovers. It’s well known that a number of industries struggled to make it through the pandemic, with the restrictions enforced by the government, changes to travel and shopping habits having significant impact on businesses.

2022 saw a fall in the number of businesses by 1.5% compared to the previous year. This slight decrease may be influenced by the rising cost of living in the UK, with factors such as the Covid grant schemes coming to an end, and increased energy bills and rising inflation affecting budding entrepreneurs. For instance, 41% of trading businesses reported a rise in the price of goods or services bought in December 2022, compared to November.

But before you let any doubts slip in, it’s important to note that there has been a notable increase in the number of businesses in the past year, with a year-on-year change of 0.8% between 2022 and 2023, or 46,200 more registered businesses (looking at business numbers as they stand in October 2023) - a rise for the first time since 2020. This rise has been led by the number of businesses with no employees that are not VAT-registered, which increased by 2.9% in the past year.

With this in mind, you could be choosing a good time to make your business dreams come to life. It’s worth noting, there’s always going to be a risk; keep an eye on what’s going on in the current economy, including any projected impact from the government’s budgets to help you decide when the time is right for you, to maximise chances of small business survival.

Small business survival rates in 2023

According to research by Fundsquire, around 20% of businesses fail within their first year, and 38% of startups fail due to running out of funds. But rather than letting these statistics put you off chasing your dream, why not use them to motivate you? We know you have what it takes to succeed. In fact, of the 531,312 businesses set up in 2013, 30% are still thriving in 2023 - a whole decade later! And while it’s said that just over a third of UK startups make it beyond five years, when looking at businesses formed in 2018, an impressive 47% of those companies still exist today.

It appears that survival rates are on the rise in the early stages of business life too, with 88% of businesses set up in 2022 still operating in October 2023 - up from an estimated 80%. This could be due to the ever-evolving digital world providing resources and opportunities, to reduce risk, as well as the industries entrepreneurs have been choosing to opt for.

Fastest growing industries for UK small businesses

Knowing which industries have the highest business growth rate could steer you in the right direction, especially if your business idea isn’t yet set in stone. We’ve explored the fastest growing industries in the UK to offer some inspiration for which industries to research further to help solidify your decision. Whether that’s capitalising on a growing industry itself, or through seeing similar patterns in another industry and predicting its advancement to come.

When looking at which industries are growing longer term, over the past five years, the manufacture of other non-metallic mineral products came out on top, with an impressive 172% increase in the number of businesses in the UK. This covers a broad range of manufacturing from construction and architecture supplies, to ceramic and clay goods or even packaging supplies.

Other contenders for the fastest growing industry include wholesale trade (excluding motor vehicles and motorcycles) with a 70% increase over five years. As the retail trade industry sees growth, wholesalers and manufacturers will also benefit, to supply these businesses with stock.

The manufacturing of chemicals and chemical products industry is also a top industry for growth, experiencing a 60% increase in the number of businesses over the past five years. This is quite a broad category too which includes everything from cleaning products, to essential oils, paints and dyes, fertilisers and industrial gases.

Whilst some of these divisions are quite broad, it appears retail and manufacturing industries are seeing positive signs in the number of entrepreneurs starting new ventures - which could be a hint that these are ones to explore.

If you’re interested in exploring these categories further, you can find all of the government SIC codes here and explore which businesses come under each category using the database search on Companies House.

It’s important to remember that growth and demand can change year-on-year, depending on a range of factors. Take for instance ‘Residential Care Activities’, this industry saw a 54% rise in the number of businesses registered over the last five years, however, in the last year there has been a 14% decline. The need for residential care is still evident, but the economy, lack of government funding and cost of living might be having an impact on survival rates over the past year, showing how multiple factors can come into play.

Looking specifically at the last year, the travel agency, tour operator and other reservation service and related activities industry has seen the biggest growth in terms of the number of businesses registered, at 12%. Despite the disruptions to travel experienced over the past few years, the industry is growing again, and with over half of people in Britain planning to spend more on travel in 2024, this might continue to be an area in which we see more new businesses over the coming years.

Sewerage was the industry seeing the second highest growth in business numbers over the past year with 11% growth, followed by companies in manufacturing of coke and refined petroleum products at 8%. Advertising and market research also made the top 10, with a 5% increase in the number of businesses registered in the past year, aligned to the steady growth being seen in advertising this year, and predicted for next year too.

The UK locations where the most small businesses were started

Wondering where in the UK is seeing the largest growth in small businesses? We’ve analysed Companies House data on a regional level to see which areas have seen the most small businesses (with a company size of 0-49 employees) formed over the last decade.

Before jumping into the findings, it is important to note that as we live in a digital age, depending on the industry they operate in, some businesses could be serving customers further afield, not just in their local area.

Outside of London, the East Midlands has seen the largest growth in the number of small businesses. In 2013, the East Midlands saw 313,100 small businesses registered, and 378,800 in 2023 - a 21% increase over this 10 year period. This impressive growth may have been influenced by the UK government’s Levelling Up initiative, which has invested over £1.2 billion in projects for locals and businesses across the East Midlands. Other top-performing regions for the number of small businesses include the North East and West Midlands, which have both seen an increase of 16% over the past 10 years.

To delve further into the UK hotspots for new businesses, we’ve explored which local authorities have seen the highest business survival rates over the past 10 years. This data should shine a light on which locations may offer you a stronger chance of success for your new venture.

Edinburgh takes the top spot with a 51% survival rate for businesses started in 2013, and a 59% survival rate for those started five years ago, in 2018. This higher than average survival rate could be due to a number of factors, such as the graduate pool from the city’s four universities, including one of the world’s top universities, the University of Edinburgh, as well as the city’s innovation and local support for businesses.

Herefordshire came out second with a 49% 10 year survival rate. The local council in this part of the UK holds quarterly business briefings and six-monthly face-to-face business meetings to support local businesses which could be paying off. Winchester rounds out the top three with a 46% 10 year survival rate for businesses registered in that local authority area.

Just like in Herefordshire, Winchester council has an offering to support small businesses too, with training, networking, mentoring and one-to-one business advice. It’s worth looking into what your local council has on offer for businesses, and considering how this could support the success of your venture, in whichever industry you choose to pursue.

Fastest growing industries for UK small businesses by region

The most common industries that have encountered the most growth across regions over the last three years are retail trade and real estate. In 2023, retail trade has been the most popular industry for newly registered companies across the majority of the regions. However in the East Midlands, East of England, North East and South East, real estate took the top spot as the most common industry - unsurprisingly, given the vital role that real estate plays in the UK’s economy. In 2022 alone, the real estate industry generated a turnover of over £65 billion.

However, when looking at the most distinctly popular industries - the industries seeing regional growth at a rate above the national average - there largely appears to be a shift depending on location.

In 2022, crop and animal production took the top spot for the most distinctly popular industry, in both the South West and East Midlands. In the East of England, the farming industry produced a total income of £1.1 million - an impressive 82% increase since 2018. Considering over four in 10 Britons said they’re more likely to buy British produce as a result of Brexit, there may be an increased demand for local farming across Britain. As an upcoming business owner, keeping an eye on the news and economic change can help you prepare your business should it be impacted by world events and changes to consumer preferences.

In both the West Midlands and North West, postal and courier activities were the most distinctly popular industry for new businesses in the past year. The rise in demand for couriers has significantly increased following the Covid-19 pandemic, with many shoppers turning to online shopping for the first time. And despite the current cost of living crisis, 63% of businesses surveyed by YouGov reported the demand for delivery services increased in October, November and December 2022. This increased demand allows businesses to fulfil the needs of their customers, who are likely seeking the convenience, faster delivery and advanced tracking of their orders that online delivery services deliver. Keeping an eye on consumer trends will help you adapt your business, target your customers’ needs and join an industry which is set to grow.

Conclusion

Starting a business takes hard work and commitment, but the rewards are second to none. If you’re looking to make your mark on the business world, we hope our small business report has shed some light on the latest trends and insights across the UK. Here are some key takeaways to bear in mind, as a budding entrepreneur:

Keep an eye on consumer trends and political change, so you can tailor your business offering accordingly to meet the needs of your customers.
Look out for local government support to give your business a boost, such as Levelling Up, in which the UK government is investing £13 billion in local businesses across the country.
If you haven’t yet decided on the industry you’re going to operate in, it may be worth exploring industries that are in high demand, particularly those in your region or city.

Ready to step into those new boss shoes? We believe you’ve got what it takes. If you’re ready to form your business, check if your business name is available and we’ll help you get started. If you’re setting up a limited company or limited liability partnership (LLP), we’ll also register your company with Companies House, completely free of charge (it usually costs £50), so you have less to worry about.

Methodology

The data was gathered from Business Population Estimates statistical series and Companies House.

Business survival rates were estimated based on the number of companies registered in a given year that remain active and/or open (as per Companies House search filters), compared to the total number of companies incorporated in that year.

Company counts by industry correspond to the number of companies registered under a given Standard Industrial Classification (SIC) code, aggregated to the level of Division.

Most common industry among newly registered companies represents the industry division with the highest number of companies registered in a given year and location.

Most distinctly popular industry among newly registered companies was calculated using location quotient – a measure of how much more popular a given industry is in a given region, rather than nationally. Industries that had the highest share of businesses in a given region compared to the national average were deemed the most distinctly popular. For example, 2% of all businesses registered in Wales in 2023 were in the Accommodation industry - 2.8 times higher than 0.7% of businesses that were registered in that industry in the UK that year. Accommodation's location quotient was, therefore, 2.8 and as that figure is the highest of all industries in Wales, it was deemed the most distinctly popular industry in Wales in 2023.

Data was collected in October 2023.

Author bio

Lucy Hancock is an experienced finance writer, having previously worked for Staysure Travel Insurance before working at MoneySuperMarket where she specialised in all areas of personal finance, from credit cards and loans to pensions and retirement planning. Having worked in digital marketing for several years, she’s passionate about the value small business marketing can bring to those looking to grow their businesses. She has written extensively across all areas of business and personal finance, to help business owners like you make informed financial decisions.