UK small business sales lose momentum despite interest rate cuts

London — 31 July 2025 — UK small business sales growth slowed sharply in the June quarter (April to June), despite two official interest rate cuts earlier in the year, according to the latest Xero Small Business Insights (XSBI) data from Xero, the global small business platform.

The sales slowdown in the June quarter marks a loss in momentum following the previous two quarters when small business sales were growing at more than 5% year-on-year (y/y). Sales growth was solid in early 2025, reaching 8.0% y/y in March, before easing in subsequent months as consumer caution appeared to outweigh the impact of rate cuts. Nevertheless, small business sales are still growing in the UK, despite the macro-economic headwinds and heightened levels of uncertainty.

Consumer caution persists despite interest rate cuts

In the June quarter, sales rose just 2.3% y/y, down sharply from 5.5% y/y in the March quarter (January to March). Following strong results in the month of March, sales growth slowed to 2.7% in April and just 0.6% in May, before a modest rebound to 3.6% in June, likely reflecting some delayed impact from the Bank of England’s second interest rate cut of the year.

While some sectors saw modest gains, many small businesses, particularly those reliant on discretionary spending, have yet to feel the benefits of rate reductions. Retail (-0.6% y/y) was the weakest-performing sector, while hospitality (+1.5% y/y) also continued to struggle under the weight of ongoing economic pressure.

In contrast, sectors offering more consumer experiences like arts and recreation grew 3.4% y/y, suggesting some consumers are prioritising leisure activities. Industries showing stronger-than-average growth included manufacturing (+4.4% y/y), healthcare (+4.3% y/y), and education (+4.1% y/y), pointing to more stable demand across essential services.

“Small businesses are definitely feeling the heat at the moment in more ways than one, and Q2 was no different,” said Kate Hayward, UK Managing Director at Xero. “In fact, consumers appeared even more cautious with their spending when interest rate cuts should be easing that pressure. We need to see that translate into stronger demand, as many businesses continue to face a tough operating environment.”

Sales growth slows across all UK regions

All UK regions recorded slower sales growth in the June quarter. Wales saw the steepest decline, falling from +8.1% y/y in March to just +1.5% y/y in June. Scotland (+3.3%), the East Midlands (+3.1%) and the South East (+2.8%) were the only regions to outperform the national average.

The results suggest that rising costs and other national pressures are having uneven effects across the country, with local economies responding in different ways.

Cautious optimism amongst business owners

Despite ongoing challenges, small businesses remain broadly optimistic. A Xero poll of 600 UK small businesses in June found that 76% remain positive about the future of their business, down slightly from 81% in May. Improved sales were one of the top reasons behind this sentiment, cited by 36% of respondents. This suggests that, despite the broader slowdown, many business owners feel their sales are heading in the right direction. Other reasons for optimism included more work coming in (40%) and stronger cash flow (34%).

While optimism remains relatively strong, small business owners continue to contend with high operating costs, including rising National Insurance contributions and the National Living Wage, as well as uncertainty around the forthcoming Employment Rights Bill and wider global economic headwinds. A further interest rate cut, expected as early as August, could help stimulate demand in the months ahead.

See the findings in more detail here.

ENDS

Media Contact

Xero Communications UK | Sophie Whitney | ukpress@xero.com

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