The UK government's spending review has set out its priorities for the next three years. But behind the rhetoric about boosting growth lies growing concern about small businesses being locked out of the wider UK economy. Government funding and regulation are increasingly out of step with the reality of micro-enterprises and sole traders, shutting off their potential to boost GDP growth.

These businesses already punch above their weight, accounting for 60% of private-sector employment and more than half of total business turnover. Yet while recent budgets have pushed up costs through higher employer national insurance (NI) contributions and minimum wage rises, little meaningful relief has been offered in return.

As a result, a recent British Chambers of Commerce survey found that 82% of businesses expect the NI hike to damage their business. More than half say it will affect recruitment plans, prices and day-to-day operations.

Working with small businesses, apprentices and local enterprise leaders, we have seen how government support schemes often fail to reach those who need them most. Our research into informal work and legitimacy shows that many micro-businesses (ten employees or fewer) and sole traders operate in a space where regulatory demands feel misaligned with their economic reality.

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Across the UK, many micro-businesses already operate on a thin margin. For some, formal compliance with tax, labour and reporting obligations is simply out of reach. This is not due to unwillingness, but rather to a lack of manpower and time. In short, it is not about criminality, but survival.

And when formality becomes unviable, the government loses out too through reduced tax receipts, lower NI contributions and missed opportunities for growth.

In our research, we've found that formal and informal business owners don't reject regulation outright. They reject complex systems that demand compliance without offering security. When the risks of being "seen" by the taxman outweigh the benefits, informality becomes a rational, even morally justifiable, choice.

Informality is a significant global issue. According to the 2025 report by the International Labour Organization, even in high-income countries like the UK around one in ten workers are informally employed. And more than 60% of these people are working within formal enterprises, typically as undeclared workers.

Informal work is most common in service and construction industries, and despite high education levels, nearly one in four informal workers lives below the poverty line. This compares to just 14% of formal workers.

In the UK, regulatory structures can make matters worse. The VAT threshold, recently raised to Pound 90,000, may appear generous. But it can act as a cliff edge, discouraging small businesses from growing.

Evidence from the International Monetary Fund shows that firms often intentionally limit turnover to avoid registration. Compliance costs and administrative burdens create a clear disincentive to scaling up.

The slowdown is measurable. Small businesses reduce growth by up to 25% as they near the threshold, with no rebound in performance post-registration. This suggests a structural effect rather than temporary caution. Around one in five firms reports actively avoiding VAT registration by turning down work or restructuring operations. It's a clear sign that the system discourages formal expansion.

These structural barriers don't end with taxation. Even when support schemes are well designed and effective on paper, many small firms find themselves excluded by eligibility criteria or overwhelmed by the administrative requirements. For example, the Help to Grow: Management programme has delivered clear value, equipping thousands of SME (small and medium-sized enterprises) with vital skills in strategy, finance and innovation.

However, it is limited to businesses with five or more employees. This excludes sole traders, some micro-businesses and early-stage entrepreneurs, among others. These smaller firms, often operating informally or semi-formally, are arguably those most in need of accessible, flexible support. By overlooking them, even well-intentioned programmes risk reinforcing the gaps they aim to close.

Read more: How much for cash? Why the informal economy is bad for business, consumers and society

Apprenticeship policy highlights another example of unintended exclusion. While apprenticeships are promoted as a win-win for employers and learners, the funding rules and regulations are typically geared towards larger organisations.

For micro-businesses, the system often feels impenetrable. The administrative burden and cash-flow implications of taking someone away from their role to train them frequently outweigh the perceived benefits.

Adding to these challenges are the recent changes to Level 7 apprenticeship funding rules, in the form of age restrictions. This raises concerns about whether smaller employers will continue investing in leadership and skills development.

As a result, some of the smallest firms, particularly in personal services, trades, and early-stage startups, miss leadership development opportunities. This is not because they lack interest in training, but because the system was not designed with their scale or reality in mind.

If the government wants to support small businesses, it must move beyond one-size-fits-all tax tweaks and headline grants. It has signalled a commitment to fiscal efficiency and targeted growth. What's needed is a new model of support - one that recognises the complexity of informality, business growth and builds trust and opens routes into formal economic participation.

This means creating tailored support and offering incentives to grow and develop for sole traders, self-employed people, and micro-businesses rather than penalising them. The government must simplify support mechanisms and ensure they are genuinely accessible - particularly for time-poor micro-businesses.

It should move beyond rigid digital portals and offer relationship-based support through local networks, trusted intermediaries or one-to-one guidance. Crucially, access to skills programmes, including apprenticeships, should be guaranteed for businesses of all sizes, not just those large enough to navigate complex eligibility criteria or absorb upfront costs.

Without these measures, the UK will only deepen its two-tier economy - where formality becomes a privilege rather than a pathway. Building a fairer, more dynamic business environment starts by including those already doing the work, even if they are not yet on the books.