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Learning Curves: Shaping small business growth through skills, education and training

Learning Curves Shaping small business growth through skills, education and training

August 2026

fsb.org.uk 1

Learning Curves: Shaping small business growth through skills, education and training

Acknowledgements This report was written by Arthur Fyfe-Stoica, Policy Advisor for education and skills. Special thanks to FSB’s policy, government affairs, and media and communications teams, in particular: Tom Blenkinsop, Senior Government Affairs Advisor; Padraig Blee, Government Affairs Advisor; Charlotte Talbot, Senior Media & Communications Advisor, and

Chris Russell, Senior Policy Manager. Special thanks also to the members of FSB’s Policy Champion, Hollie Whittles. Thank you also to all the FSB members who fed into this work. The report was designed by Cactus Design Limited – a small business based in Wales.

Who we are The Federation of Small Businesses (FSB) is the UK’s grassroots business organisation. We are a crossparty non-profit body that represents small business and self-employed members in every nation and region. For over 50 years, we have been the authoritative voice on policy issues affecting the UK’s 5.7 million small and medium businesses, microbusinesses and the self-employed. FSB is the UK’s largest business group and leading business campaigner, focused on achieving change which supports smaller businesses to grow and succeed. We also provide our members with a wide range of vital business services, helping them to start, run, and grow successful businesses through high-quality protection and support. This includes 24/7 legal support, financial expertise, training and events, debt recovery and employment/HR advice – alongside a powerful voice heard by governments at all levels.

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Our local, national and international campaigning helps shape policy decisions that have a direct impact on the day-to-day running of smaller businesses. We work for their interests through research and engagement with our members, and by effective campaigning – influencing those in power through policy analysis, government affairs, and media and public relations activity. Our policy and advocacy work starts with our expert team in Westminster, which focuses on UK and England policy issues, the UK Government, Parliament and the media. Further to this, our teams in Glasgow, Cardiff and Belfast work with governments, elected representatives and media in Scotland, Wales and Northern Ireland.

Learning Curves: Shaping small business growth through skills, education and training

Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Key findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Key recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Introduction: The cost of standing still . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Chapter 1: The labour market context and small business hiring . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Chapter 2: Skills gaps and how small firms are responding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Chapter 3: Training in the workplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Chapter 4: Apprenticeships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 Chapter 5: Supporting young people into the world of work – T Levels, careers advice, and work experience . 49 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

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Learning Curves: Shaping small business growth through skills, education and training

Foreword To have a productive and growing economy, business owners and their staff must have the right skills. It allows them to work efficiently and adapt quickly to the inevitable changes and challenges that come hand in hand with running a business. Yet small businesses are still struggling with skills gaps and shortages. Often, they cannot recruit people with the skills they need, or they face challenges developing the skills of their existing workforce. With employment costs on the rise, improving productivity is more important than ever. Without access to talent, many small firms are unable to reach their potential, holding back both their own success, and the wider economy. The rising number of young people not in education, employment or training (NEET), declining young apprenticeship starts and an ever-evolving labour market highlights the need for a skills system that works for both employers and learners at all stages - helping young people into their first job and supporting those retraining or returning to work in later life.

departmental responsibilities provide an important chance to strengthen work between employers, education providers and policymakers, making sure skills provision meets business and economic needs. This report looks to understand how small businesses view and interact with the current skills system, identifying what employers want and need from education and training provision. The report’s recommendations examine where current Government policy is working in England and where it could better reflect their needs, covering apprenticeships, in-work training, and supporting more people into work. They make the case for a skills system that works well with small employers, providing opportunities to every part of the country. With the right policies in place, we can make sure workers and business owners are equipped with the skills needed to succeed, help small employers grow, and build a stronger economy across the country.

These challenges come at a pivotal moment. We have already seen substantial reforms in the education and skills system, including the introduction of the new Growth and Skills Levy, Skills England, the doubling of expected work experience hours and a new Youth Guarantee. The introduction of the £2,000 young apprenticeship incentive for non-levy payers and paid placements have been positive changes, helping small firms provide entrylevel roles. As these reforms take shape, there is a real opportunity to build a new system that supports small employers and helps them access the talent they need. For a new Government focused on devolving power beyond Westminster, making sure skills provision is in line with local industries and priorities will be key. The appointment of new ministers and changes to fsb.org.uk

Hollie Whittles MBE

National Policy Skills Champion, Federation of Small Businesses 4

Learning Curves: Shaping small business growth through skills, education and training

Key findings

Four out of five

small businesses that recruited apprentices in the last three years, hired a 16 to 24-year-old

19%

84%

of small businesses have had to scale back projects or downsize because of recruitment difficulties

of small firms undertook training in the past 12 months, with 68% funding it themselves

48%

31%

of small businesses said more tax reliefs would incentivise them to undertake more training

LEVEL

of small businesses have engaged with educational institutions in the last three years

LEVEL 3

64%

of small businesses that have hired apprentices in the past three years have done so at Levels 2 and 3 fsb.org.uk

On average, small businesses spent

£1,810

per staff member on training in the previous 12 months 5

Learning Curves: Shaping small business growth through skills, education and training

Key recommendations • HM Treasury should introduce an SME Training Tax Credit that covers 20 per cent of the training costs for small firms with an annual payroll of less than £1 million, when training is provided by an accredited external provider. To be uprated with CPI each year. Page 38. • The Department of Work and Pensions and Skills England, working with the Ministry of Housing, Communities and Local Government, should establish a national web of Sector Skills Networks. These networks will be industry-led bodies that support employers in identifying high-quality training providers and courses, broker and streamline training for their sector. Page 38. • The Department for Work and Pensions should rename Apprenticeship Units to be ‘Short Courses’ and extend their funding eligibility to the self-employed and sole traders. Page 47. • The Department for Work and Pensions and Skills England should make the apprenticeship market work for small employers, holding providers accountable for how they support non-levy payers and providing brokerage to match employers with apprentices. Page 46. • The Department for Work and Pensions and Skills England should redesign the employer experience of the apprenticeship service so that a small firm hire and manage apprentices through a standardised set-up process and a single digital dashboard to track apprenticeship progress. Page 46.

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• The Department for Business, Innovation, Science and Trade should build on the successful Help to Grow Management scheme to reach more small businesses and equip firms to adapt and thrive during economic change. Page 26. • The Department for Business, Innovation, Science and Trade and the Department for Work and Pensions should introduce a New Trader Allowance for jobseekers, and people with disabilities to support them transition into entrepreneurship. Page 14. • The Department for Work and Pensions should work with the Ministry of Housing, Communities and Local Government to give complete control to strategic authorities over Adult Skills Funding and require that their commissioning aligns with the recommendations of their Local Skills Improvement Plan. Page 26. • The Department for Education should develop a dedicated small business engagement offer, with a simplified school partnership model through the new careers advice support service. Page 54. • The Department for Education should introduce a one-off ‘First Placement Payment’ to employers hosting their first work experience placement under the Work Experience Guarantee. Page 54.

Learning Curves: Shaping small business growth through skills, education and training

Introduction: The cost of standing still The UK economy is in a profoundly weak position. A succession of economic setbacks has seen living standards and growth repeatedly corroded and has left GDP growth per person at just 0.1 per cent per year since 2020, compared to 1.3 per cent in the preceding decade.1 In other words, the UK has taken six years to grow as much as might have been expected in seven months. The decline in growth is even steeper when considering that before the 2008 Financial Crisis, the annual rate of growth was 3.2 per cent from 1997-2007.2 Since the crisis, two decades of persistently low productivity growth has left successive governments’ growth ambitions doubtful and vulnerable to external tremors. Businesses have seen operating costs increase, such as the price of energy, employment costs, taxes, interest rates, and materials. Between July 2024 June 2026, UK payroll fell by nearly 163,000 people, and hiring freezes have surged, particularly in sectors most exposed to these pressures such as hospitality and construction.3 As other commentators and organisations have noted, invoking Schumpeter’s concept of creative destruction, the UK currently has the destruction without the creation. Businesses failing under the weight of rising costs does not indicate a dynamic, competitive economy, it signals one that is getting poorer than it otherwise could be. This matters directly for the Government’s own objectives. Ambitions to increase employment, reduce inactivity, and tackle the number of young people not in education, employment or training (NEET) all depend critically on employer capacity to create and sustain jobs. This is only growing in importance considering the change in focus to employers and on-the-job training that the Government is supporting to deliver greater amounts of workforce development.

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That capacity is under strain precisely when the Government is shifting greater responsibility for workforce development onto employers. Skills and training are a key ingredient of labour productivity and, more broadly, total factor productivity - the critical driver of living standards.4 Yet public and private investment into workforce development has fallen continuously, both in aggregate and per person, at a time when skills shortage vacancies have grown from 22 per cent of all vacancies in 2017, to 27 per cent in 2024, despite a cooling labour market.5 In the wake of Brexit and the tightening of immigration controls, the ability to bring talent in from abroad has reduced, requiring a greater need to develop it at home. Intensifying this, skills policy has been characterised by incessant churn. As the Institute for Fiscal Studies observes, few areas of policy have experienced as much change.6 The cycle of fragmentation, institutional fatigue and weak business engagement must be broken because where long-term focus has been sustained, results have followed. For instance, the National Literacy and Numeracy Strategies which were introduced in the late 1990s and built up over a decade produced some of the most significant improvements in primary school attainment England has seen. This is because they gave schools, teachers and local authorities a stable framework to embed and build upon.7 More recently, the Gatsby Benchmarks, introduced in 2014 and consistently maintained across successive governments, have driven measurable, system-wide improvements to careers guidance.8 These are demonstrations of what predictable, long-term institutional commitments can achieve in generating a critical mass that spurs on a process of positive change, and they stand in contrast to the UK’s policy record on skills.

Learning Curves: Shaping small business growth through skills, education and training

The risk of inadequate action is material and growing. In a weak business environment, prolonged unemployment and inactivity do not simply reflect cyclical weakness but create lasting scars for individuals, atrophying skills and experience, reducing long-term employment prospects and earnings potential. For firms, especially small businesses, uncertainty and constrained capacity risk becoming entrenched in a low equilibrium, suppressing investment and job creation as expansion is postponed. Without decisive action, these dynamics will undermine the Government’s employment ambitions, weaken productivity growth and lock in another period of stagnating living standards. In this context, skills policy is no longer a separate reform agenda but central to economic strategy. The case for placing human capital at the heart of economic renewal is therefore both urgent and essential.

The case for human capital Physical capital has moved to the centre of economic policy debate. Planning reform, infrastructure investment, and full expensing all reflect a diagnosis that the UK underinvests in its productive base relative to similar economies, and advocates are correct to say that this is a binding constraint on growth. However, this must work in tandem with improving human capital as well. The wealth of nations doesn’t just derive from technology and tangible assets, but in people’s ability to adopt and exploit them. Productivity growth – the backbone behind improving living standards – relies on labour and capital working in symbiosis.9 Both economic theory and empirical studies show that “human capital is a critical input for growth”.10 Investment into skills and training is consistently and strongly linked to delivering returns to employers, employees and macroeconomic growth. Modern economic models have emphasised the power of human capital, knowledge accumulation, and innovation, as sustained drivers of growth.11 When businesses invest into workforce development, it is often found that training does not just improve profits or individual earnings but knowledge transfers between firms. Indeed, it can act as a catalyst fsb.org.uk

for diffusing technologies and ever-increasingly competitive practices, helping drive productivity growth across industries and regions.12 The gains from increasing skills and training are not just well-evidenced, they are also particularly timely for the UK.13 For many years the OECD and IMF have reported with urgency on the need for Britain to address its “chronic” skills shortages, skills gaps and misallocation of talent as it is acting as a constant brake on potential growth.14 Addressing workforce development would therefore signal to the market that the Government is serious about achieving sustained growth. A secondary impact could provide confidence to the bond market, improving financial and fiscal stability and reducing borrowing costs. The urgency is sharpened by demographic reality. As the ratio of working-age people to pensioners narrows, immigration controls are tightened and economic inactivity rises, productivity growth becomes essential to fiscal sustainability.15 Without it, the government faces an unpalatable choice between further tax rises or the erosion of socialised welfare costs such as pensions, healthcare, and education that underpin living standards.16

Training as an asset Understanding why skills investment has declined requires confronting its inherent economic challenges. Unlike investment in equipment or commercial space, skills are intangible, difficult to value, and cannot serve as collateral.17 Employers face genuine uncertainty about training quality, prospective returns, and the risk that newly trained workers will leave before those returns are captured - a risk amplified by the UK’s flexible labour market. Where firms choose to finance training, they face a “cost of markets”18 – a cognitive overload of options for how to their invest time and money optimally. This is in many instances stressful and can lead to poor satisfaction with decisions. This is not exclusive to businesses. Even when people are looking to upskill themselves, they face uncertainty about training being value for money. For instance, multiple recent Government trials of higher education short courses saw a fraction of the take-up they anticipated, with just six to 20 per cent of expected enrolments.19 Similarly, other studies have found that most jobseekers 8

Learning Curves: Shaping small business growth through skills, education and training

have warped and incorrect beliefs about returns from training, significantly underestimating wages offered by different occupations and their labour demand.20 Instead, when considering reskilling the most important predictor was whether an occupation was compatible with their personal identity.21 Where confidence in value is ambiguous, and misperceptions about opportunities are pervasive, training is treated as a cost rather than an investment and is deferred first when margins tighten. This problem is sharpest for SMEs, which account for around 60 per cent of private sector employment, and, excluding employers of more than 100+ people, delivers £38 billion of training annually.22 Given the quantum invested each year, even a marginal increase in training investment across SMEs would generate meaningful economic returns. Yet small firms operate under tighter margins, greater exposure to shocks, and higher opportunity costs than large businesses, making their investment decisions acutely sensitive to risk, cashflow and administrative burden. At the end of 2025, investment intentions among SMEs fell to their lowest ever recorded level in our Small Business Index.23

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Therefore, improving skills outcomes requires more than flexibility in how training budgets are spent. It requires directly addressing the structural barriers, including misaligned incentives, administrative complexity, and weak confidence in returns, that suppress employer participation, particularly among smaller firms. Without reform designed around the economic realities facing SMEs, employerled workforce development will continue to underperform, and the growth potential from skills investment will remain unrealised.

Learning Curves: Shaping small business growth through skills, education and training

Chapter 1: T he labour market context and small business hiring The context of skills reform must be centred on the state of the labour market, and how it reflects the health of the broader economy. After an unprecedented period of post-pandemic tightness, the labour market continues to cool. Employment growth has stalled, vacancies have fallen sharply, and unemployment is rising. GDP grew by just 1.4 per cent in real terms in 2025, below official forecasts, and independent forecasters expect only one per cent growth in 2026.24 Without stronger economic output, employers will not be expanding and will have limited reason to hire - labour market conditions will remain cold. Policies have also added to this pressure. The October 2024 Budget substantially raised the cost of employment - increasing employer National Insurance contributions from 13.8 per cent to 15 per cent from April 2025 and reducing the secondary threshold from £9,100 to £5,000 - while simultaneously raising the National Living Wage.25 In Q2 of 2026, we found that 22 per cent of SMEs reported that they had decreased employment, and 19 per cent expect their business’ employment to fall in the next quarter.26 HMRC PAYE data confirms the effect, as payrolled employees fell by 121,000 between December 2024 and December 2025, leaving the total at 30.3 million.27 This deterioration has not fallen equally. Young people and those seeking to enter the labour market for the first time have been hit hardest. As employment costs have risen, entry-level and lowerskilled roles have been among the first to be cut or left unfilled, since policy changes have carried relatively higher increased proportional costs for low-paid jobs onto employers. The unemployment rate for 16-24 year olds reached 16 per cent in Q4 2025 - the highest since 2015 – and one million are now NEET, a 26 per cent increase from prepandemic levels.28 With 2.5 unemployed people fsb.org.uk

per vacancy in February to April 2026, up from 2.2 a year ago, the entry-level labour market is acutely competitive.29 Young people who fail to gain an early foothold face well-evidenced, persistent long-term earnings penalties, making the current environment particularly consequential for this generation’s prospects. Construction fell 2.1 per cent in Q4 2025, its sharpest quarterly decline since 2021.30 Retail, construction, hospitality, and leisure face the twin pressures of rising wage floors and weak consumer spending. The fact that these sectors, which are the least exposed to AI, reveals that augmentation and automation is not driving unemployment but rather labour costs and weak consumption. Instead, the most exposed sectors perform relatively well, as seen in the United States where AI is operating at scale.31 As margins tighten, many smaller employers are becoming less willing to take on inexperienced staff, since they can no longer easily absorb the training time and productivity gap that entry-level hiring involves. This could partly explain why UK employers are favouring more experienced candidates, particularly for roles where there is a surplus of candidates.32 This creates a paradox that runs through the skills challenge where even as unemployment rises, many employers report difficulty finding candidates with optimal skills, experience, and availability. Yet small businesses remain essential to addressing these problems. SMEs are the labour market’s most accessible and inclusive gateway, as they disproportionately employ people that are served least well by the labour market.33 This includes young people and school leavers, people with lower formal qualifications, and those returning to work after periods of inactivity, as well as those with disabilities, those requiring complex part-time arrangements (e.g. single parents) and ethnic minorities. Sectors 10

Learning Curves: Shaping small business growth through skills, education and training

The role of small businesses in hiring and training those furthest from the labour market

such as retail, hospitality, construction, and personal services provides people’s first jobs, second chances, and flexible entry points that larger employers simply do not offer at scale. The fact that vacancies have fallen most steeply for SMEs will close many avenues for employment and social mobility.34

As mentioned above, a higher employment rate depends on smaller employers having the confidence to hire and develop those who are furthest from the labour force. Therefore, it is worth establishing what small firms already do, both in whom they are willing to take on, and in how they support them once they are employed. Of the businesses that we surveyed for instance, 60 per cent of small employers reported taking on people over the age of 50, and 25 per cent reported employing people under the age of 21.

This means that a labour market in which small businesses are under sustained cost pressure is one in which inclusive employment is harder to achieve. The Government’s ambition of reaching an 80 per cent employment rate depends in significant part on smaller employers having the confidence and capacity to hire and develop workers who are not yet job-ready and being willing to train them up. The recent policy changes introducing incentives to hire young people, particularly those who are NEET, are welcome and will aid many businesses mitigate the costs and risks associated with hiring.35

Figure 1: SME employers reporting if any of their employees match these descriptions Source: FSB Skills and Training Survey, July 2025 60%

Employee aged over 50 Employee aged under 21

25%

Individuals with low levels of educational attainment

21%

Single parent

20%

Those who are the ﬁrst person in their family to attend university Someone from an ethnic minority background

18% 18%

Anyone with a disability

13%

Recent graduate

12%

Someone who has been on UC in the last 3 years Those returning to work after a career break Those returning to work after they had retired

11% 10% 10%

Former members of HM Armed Forces

Unpaid carer

Long term unemployed (12 months+)

None of the above

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10%

20%

30%

40%

50%

60%

70%

Learning Curves: Shaping small business growth through skills, education and training

This pattern of young people being more likely to be employed by SMEs than larger firms has been supported consistently in our previous research and externally elsewhere.36 For instance, in our National Living Wage Survey from 2026, we found that 29 per cent of firms employed someone between the ages of 16-20, and 65 per cent employed someone between the ages of 50-64, a pattern also seen before the pandemic.

“We take on apprentices, but it takes a lot of time and effort. We’re in a position where we’re able to do that because it’s really important to us to secure the pipeline of the future.” Heating engineering firm, South West England To reach the employment rate target, it is the youngest and eldest people of working age that the Government must focus on. High employment countries such as Switzerland, the Netherlands, Germany, Norway, Denmark and Sweden, have significantly higher employment rates for people outside of ‘prime-working years’ ages 25-50 compared to the UK, whereas the UK’s employment rate within 25-50 reflects the top performers in the OECD.37 This reflects higher rates of poor health in later life in Britain, but also higher rates of young people leaving education at age 18 compared to France and Germany which is associated with less employment in later life. We found that 65 per cent of small business employers introduced measures to support the progression of their employees. Notable actions included providing opportunities to train and upskill, apprenticeships, mentoring, work experience and internships.

Therefore, small businesses do not just play a crucial role in employing those furthest from the labour market, they also provide those people with the opportunity to gain experience and apply their education rather than letting it atrophy. Alongside lifting people’s lifelong earnings, this is essential to higher growth and living standards. This is important to understand because the growth debate is disproportionately focused on large, highly productive and innovative firms that drive a large share of output growth. These businesses are important, but in a high-participation economy with substantial part-time work, most businesses will not operate at that level.38 Even in countries like Singapore and the US where competition and economic dynamism is fiercer than anywhere in the developed world, there has always been and always will be a wide range in terms of productivity, both within and between sectors.39 However, that doesn’t mean that firms do not thrive, have competitive business practices, produce desirable goods and services, and contribute desirable socio-economic outcomes. In this context, SMEs are essential actors in achieving higher rates of employment, skills and training across the UK. Instead of focusing skills and training on a narrow front of industries and employers to make dramatic gains, a broader approach is required to deliver a significant economic benefit. Recently, the Government has acted by introducing incentives to hire young people on Universal Credit and for SMEs to hire apprentices, with the ability to combine incentives for employers. Given the additional apprentice hires achieved the last time such incentives were introduced through the Apprenticeship Grant, we should expect that this will result in many SMEs hiring more young people and individuals furthest from the labour market.40

Furthermore, social mobility employers, defined as those who employ those who are the first person in their family to attend university and/or employ care-leavers, are even more likely to invest in workforce development and provide opportunities for progression and career advancement.

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Learning Curves: Shaping small business growth through skills, education and training

Figure 2: Small businesses reporting whether they have implemented any of the following measures to provide opportunities for those furthest from the workforce.41 Source: FSB Skills and Training Survey, July 2025

56% 63%

Opportunities to train and upskill 45% 44%

Opportunities for progression / career advancement

55% 34% 35% 41%

Formal mentoring or coaching (internally or externally)

28% 30% 33% 27%

Apprenticeships 16% 19%

Funded work experience or internships

12% Signposting employees to support from community organisations, local authorities

Employee networks

None of the above

12% 11% 7% 5% 8% 5% 12% 8% 13%

Not applicable

5% 4% 10%

10%

20%

30%

40%

50%

60%

70%

80%

Employers of underrepresented workers Social mobility employers Small business employers

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Learning Curves: Shaping small business growth through skills, education and training

RECOMMENDATIONS: The Department for Business, Innovation, Science and Trade and the Department for Work and Pensions should introduce a New Trader Allowance.

• This should be targeted at jobseekers, particularly people with disabilities, which would offer tailored support and increased payments to help them transition into entrepreneurship.

• The new scheme, which would be a more effective and ambitious replacement for the New Enterprise Allowance (NEA), should be available to all of those not currently in employment, but particularly NEETs.

• It could be delivered through Youth Hubs and Youth Enterprise Coaches based in Jobcentres and provide economically inactive and unemployed young people with between six and 12 months of intensive support, depending on their barriers to work.

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Learning Curves: Shaping small business growth through skills, education and training

Chapter 2: S kills gaps and how small firms are responding Skills gaps and skills shortages present two different labour market problems which, to various extents, have always existed:

• Skills shortages occur when employers cannot find enough people to fill vacancies because there are too few workers with the required skills available in their labour market.

• Skills gaps happen when employees are already in post but do not have all the skills needed to do their job effectively. The issue here is under-skilling within the existing workforce, not recruitment.42 But whilst skills gaps, shortages, and the misallocation of skills is seen across the OECD to various extents, they represent frictions and inefficiencies in the economy that result in lost growth and a lower standard of living. For instance, a business that struggles to hire a specific skillset is unable to grow and benefit from another employee, and a worker who is not proficient in their job is producing less than they otherwise could be. Looking to the future, the need to close skills gaps and reduce skills shortages will only increase as an ageing population will require a higher level of productivity to maintain a good standard of living for retirees and reinforce fiscal sustainability. Whilst the picture has improved following Covid, and the labour market is significantly cooler than before the pandemic, as covered above, skillsrelated limits to growth remain. Indeed, the UK’s workforce has larger “and more chronic skills gaps than in most peer countries”43 alongside high rates of overqualified and misallocated workers. This is acting as a persistent and binding constraint on potential growth. Additionally, the rates of overqualification are even higher for immigrants, where highly educated foreign-born workers are skilled and educated

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beyond the requirements for their job.44 This overqualification and misallocation is materialised in skills shortages where companies are facing recruitment difficulties due to candidates having inadequate skills, experience and qualifications. These have proven to be persistent and compounding at the point of recruitment, where skill-shortage vacancies (SSVs) as a proportion of all vacancies was 16 per cent in 2011, to 36 per cent in 2022 before falling to 27 per cent in 2024.45 Whilst this pattern reflects the changes in the labour market as it rebounded following the Great Recession and the Covid pandemic, it is notable that as the market continues to loosen, SSVs are stubbornly high relative to the past. This suggests frustration among businesses who are persistently struggling to find candidates with specific skills. It should be noted that in addition to skills shortages, there can be adjacent reasons for why employers may struggle to recruit an optimal candidate. For instance, vacancies are in competition with each other and unfilled roles could be due to uncompetitive pay, overly rigid hiring practices, or the attractiveness of a particular sector or occupation.46 Together with the issue of an inadequate supply of certain skills, and the costs associated with identifying potential employees, it should not be surprising to find that recruitment is difficult for many SMEs looking to expand. Skills gaps within the existing workforce, where staff are judged to be not fully proficient in their jobs, have been falling since 2011 (apart from 2022) despite employment growth being strong until recently.47 This could reflect numerous structural factors where businesses feel less need to train employees, immigrants becoming a larger proportion of the workforce and displacing less proficient workers; and the absence of ‘growing pains’48

Learning Curves: Shaping small business growth through skills, education and training

“I had a lot of trouble trying to recruit a technical lead. I was aiming to employ someone who was post-PhD, and we found that with some applicants they had the qualifications but lacked the key skills or experience of working in industry. They would need so much development on how to work in the business.

such as business growth, innovation and the development of new products. However, this could reverse if the economy grows and businesses seek to expand their operations.

Small businesses’ recruitment difficulties In our survey, two thirds (66%) of small business employers have tried to recruit someone in the past 12 months. Of those that tried to recruit, 81 per cent reported having difficulties in recruiting staff.

When we tried to recruit, we had about 90 per cent of applicants who needed sponsorship for their visa, but I’m too small a company to be able to sponsor someone’s visa. Not enough UK nationals were applying for the position, as lots of the university graduates in the food industry are going to work for the big companies under their graduate training schemes.”

Recruitment difficulty appears to rise steeply with size, from 48 per cent of businesses with one to nine employees, to 77 per cent of those with 10 to 49, and 84 per cent of those with 50 to 249. This primarily suggests it is a consequence of how often each group recruits. Nonetheless, recruitment is routinely difficult for employers of all sizes.

Food scientist consultancy, East Midlands

Figure 3: Small employers reporting recruitment difficulties in the past 12 months Source: FSB Skills and Training Survey, July 2025

84%

50-249

77%

10-49

48%

1-9

10%

20%

11%

13%

30%

40%

50%

12%

39%

60%

70%

80%

90%

100%

Yes, we’ve had some difﬁculties No, we’ve had no difﬁculties We haven’t needed to recruit / not applicable

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Learning Curves: Shaping small business growth through skills, education and training

Figure 4: Small businesses who have faced difficulties recruiting in the last 12 months, on why they have struggled Source: FSB Skills and Training Survey, July 2025 Applicants lacking relevant job-speciﬁc or technical skills

64% 61%

Applicants lacking relevant experience Low number of applicants generally

42%

Applicants lacking relevant soft skills

37%

Applicants lacking relevant qualiﬁcations

35%

Unable to compete with other ﬁrms on wages / beneﬁts My business is too remote / lacks transport options

28% 12% 11%

International recruitment is too hard Job entails shift work / unsociable hours

Hiring for temporary work

Lower availability of non-UK workers Other, please specify NET: Lack of relevant qualiﬁcations, skills and experience 0%

5% 20% 80% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

The significance of candidates lacking qualifications, skills or experience is striking and indicates that many businesses generally are not struggling to find people, but that it is difficult to find applicants that are work ready. For other firms, a low number of applicants is still a significant issue and was more acute in rural locations (52% of SMEs in rural locations, compared to 36% in urban ones). Additionally, the issue of wage competitiveness likely interacts with the problem around applicant quality, as SMEs are unable to match salary progression and pay benefits of larger employers and therefore miss out on some candidates. Despite this, as the labour market enters a period where jobseekers are competing more for a small number of vacancies, we should not expect this to resolve what is fundamentally a candidate quality problem for small firms.

fsb.org.uk

“There’s a massive shortage of podiatrists, so trying to recruit is a nightmare. It’s not deemed to be a shortage area by the government because they decided they wouldn’t provide podiatry anymore – only for certain acute patients. Consequently, they only need a small number of podiatrists in the NHS, but that’s not the demand in the real world. Many people also left the profession during Covid or have retired early. There’s a distinct shortage of people qualifying, and those that do move to urban areas like London or Manchester. Five or six years ago I could probably advertise, and we were flooded with applicants, but now I have a much smaller number of applicants.” Podiatrist, South West England 17

Learning Curves: Shaping small business growth through skills, education and training

Figure 5: Small businesses on why they have struggled to recruit people over the past 12 months (2022) Source: FSB Skills and Training Survey 2022 Lack of individuals with the relevant experience

72% 62%

Low number of applicants generally Lack of individuals with the relevant qualiﬁcations

52%

Lack of individuals with the relevant soft skills

29%

Unable to compete on wages / beneﬁts

28%

Lower availability of non-UK workers

14%

Job entails shift work and/or unsociable hours

12%

The location of my business is remote/few transport options

10%

Too many barriers to recruit from outside of the UK

10%

Temporary work

3% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Skills gaps and shortages have shifted since 2022. Small businesses were far more likely to report a simple shortage of applicants (58% vs 42% today) and applicants lacking relevant qualifications (48% vs 35%). The easing of these figures reflects a labour market that has loosened since the exceptional tightness of 2022. However, the persistence of skills and experience gaps - which remain the dominant concern in both years - underlines that this is a structural challenge rather than a cyclical one. The slight increase in soft skills concerns (from 28% to 37%) is also worth watching, potentially reflecting changing employer needs as result of technological change, or a shift in the candidate pool composition. In response to skill-related vacancies, 70 per cent of SMEs have tried to overcome their recruitment challenges. Encouragingly, many businesses were not prevented from growing due to these issues. However, nearly a fifth of small businesses have scaled back (19%) or are planning on scaling back (17%) or downsizing due to recruitment difficulties. Similarly, a lack of appropriately skilled staff was fsb.org.uk

cited as one of the top three barriers to business growth for 11 per cent of SMEs in our Small Business Index in April 2026. For businesses that were anticipating to grow moderately or rapidly, a lack of appropriately skilled staff was cited at a higher rate at 16 per cent.

“Recruitment is a huge challenge for us. One of the main reasons is we’ve got to attract people that are willing to travel into the office as we operate in a hybrid model. We’re looking for very technical people in a rural area of the country, so we take a different stance to applications. We’re always open to applications because you never know when the right person is going to apply or be in the area. It prohibits us from growing properly because it is a real challenge.” Data and Analytics firm, West Midlands 18

Learning Curves: Shaping small business growth through skills, education and training

Figure 6: How SMEs have responded to recruitment difficulties in the last three years, and how they expect to respond in the coming year Source: FSB Skills and Training Survey, July 2025 Increase my own workload Increase salaries

14%

Offer ﬂexible working

12%

Scale back on projects or downsize Increase training Invest in staff incentives to encourage retention

11%

Use new recruitment channels or methods Increase advertising / spend on recruitment

Redeﬁne existing jobs

Hire apprentice(s) Automate roles 4%

None of the above I haven’t / don’t plan to take measures in response

19% 17% 18% 15% 16%

15% 11% 13% 13% 12% 11% 12% 15%

9% 11%

Offer more opportunities to young people 2%

32%

25% 22% 23%

Hire contractors or outsource work

Sponsor and employ non-UK nationals

39%

21%

7% 6%

10%

23% 24%

15%

20%

25%

30%

35%

40%

Steps taken in the last three years Planned steps in the next 12 months

We can see that businesses have largely adapted to the challenges around recruitment by working harder and making roles more attractive to applicants. Overall, responses to recruitment difficulties are on a downward trend compared to our last skills survey.49 In comparison to 2022, we can see that plans to increase salaries, training, and changes to recruitment have fallen. Conversely, plans to automate roles and increase outsourcing have risen. This reflects the higher costs related to employment which disincentivises workforce development in favour of contractual work and is further evidence for the symptoms of a cooler labour market. Taken together, the difficulties that businesses face in making hiring decisions and the rates of overqualification and misallocation in the economy suggests that the labour market does not necessarily lack skills in aggregate but struggles to match fsb.org.uk

credentials with vacancies.50 This is essential for policymakers to appreciate because more training provision will not address this friction. Instead, where experienced workers exist whose competence goes unrecognised, or where overseas-trained workers are working below their qualification level, the faster and more cost-effective remedy is recognition rather than repetition. As noted above, the UK’s foreignborn workforce now accounts for 19 per cent of all workers, and overqualification rates among immigrants are consistently higher than for UK-born workers, meaning that skills and experience which already exist in the workforce are going to waste.51 At the same time, sectors like construction are losing experienced workers to ill-health and retirement faster than new entrants can replace them, leaving firms unable to fill roles despite candidates existing who could, with modest support, meet the required standard.52 19

Learning Curves: Shaping small business growth through skills, education and training

Figure 7: How small businesses have responded to recruitment difficulties in the last three years, and how they expect to respond in the coming year (2022) Source: FSB Skills and Training Survey, 2022

37%

Increased salaries

24% 26%

Increased training for existing staff

22% 24%

Hired contractors or outsourced work

18% 23%

Used new recruitment channels or methods

16% 18%

Increased advertising on recruitment

12%

Hired an apprentice

17% 15%

Invested in incentives to boost retention

17% 16% 15% 14%

Offered more opportunities to young people

13% 11%

Redeﬁned existing jobs 9% 8%

Automated roles to reduce labour required 1% 3%

Sponsored and employed non-UK nationals Don't know

5% 21%

Not applicable None of the above 0%

9% 14% 3% 5%

10%

15%

20%

25%

30%

35%

40%

Steps taken in the last three years Planned steps in the next 12 months

What is required is improvements to the recognition of people’s skills and abilities at the point of recruitment, and a system of bridging qualifications that provides a route for experienced workers to be brought up to the required standards, which could apply to UK nationals and immigrants alike. For instance, the Trades Recognition Australia framework allows for overseas-trained workers an alternative to repeating full qualifications, where their existing competence is assessed and the remaining gap in knowledge is prescribed for targeted training.53 A UK equivalent could provide fsb.org.uk

a proportionate route for SMEs experiencing skills shortages or skills gaps the ability to meet business needs without the full cost and time sink of learning whole qualifications from scratch. Similarly, there is a structural friction in the ability of SMEs to assess overseas qualifications. UK ENIC, the national agency responsible for providing statements of comparability for overseas qualifications, charges fees that place recognition out of reach for lower-wage workers, particularly in the trades. When cumulative assessment costs are added, which in some shortage occupations 20

Learning Curves: Shaping small business growth through skills, education and training

exceed £2,000 before lost earnings are factored in, the total cost of formalising a worker’s existing competence can rival the cost of retraining from scratch.54 For small businesses that cannot absorb these costs on behalf of employees, or that lack the HR infrastructure to navigate the process, this effectively means experienced workers remain underutilised and vacancies remain unfilled. Reducing the financial barriers to recognition through subsidised ENIC statements and capped assessment fees in designated shortage sectors would unlock a supply of experienced labour that policy currently underserves. According to employers the supply of labour is further constrained in the skilled manual trades where many roles struggle to compete for labour as occupations in other industries are seen as more desirable. Additionally, there are very notable gender imbalances within trades, indeed, women hold just one to two per cent of jobs in these professions, a share that has barely shifted in two decades, even as female representation in the professional and officebased parts of construction has reached around 15 per cent. 55 Whilst gender imbalances are seen across the economy, we welcome that the CITB has identified this particularly stark gap, describing women as one of the talent pools the sector does not adequately access. 56 This is particularly important from the perspective of small businesses, as SMEs and the self-employed account for a far larger share of activity in these trades than in most other industries.57 But more than limiting a supply of labour it also represents lost economic output, and the Government has already accepted this reasoning elsewhere. The Women in Tech Taskforce that was established in December 2025 was set up on the basis that the economy loses an estimated £2 to £3.5 billion a year because women leave that sector.58 Given that the construction workforce is a major political priority of the Government, a similar taskforce to focus on the under-representation in the skilled manual trades would be a welcome intervention, consolidating and responding to the complex reasons that drive gender imbalances in the sector and increasing female participation, particularly in manual occupations.

fsb.org.uk

Skills seen to be the most important for the future growth of businesses Whilst many surveys and reports can emphasise the lack of technical, professional or vocational expertise as the driving force behind skills shortages, these were not reported most frequently as the skills essential for future growth. Respondents to our survey overwhelmingly expressed that soft skills were important for the growth of their firms.59 When considering the sectoral breakdown, small businesses in the professional, scientific and technical activities sector are more likely to say communication skills are important to future growth (72% compared to an average of 62%), whereas small businesses in the wholesale and retail sector are less likely to say communication skills are important (58% compared to an average of 62%). This has been reflected elsewhere, where employers are willing to pay more for stronger soft and social skills.60 Two fifths of businesses (41%) also cite basic digital skills as important for the future growth of their business, so staff can competently navigate everyday digital tools. But this should not overlook the importance of technical and job specific skills for future growth. Given how highly it has scored alongside soft skills, SMEs see the two skillsets as complementary rather than in competition. For instance, considering that SMEs that had recruitment difficulties most frequently cited applicants lacking job-specific technical knowledge (64%), this indicates that technical skills are both the hardest thing to recruit for and one of the most important drivers of future growth. This is also seen with graduate premiums for STEM, law, finance and management degrees which have held up across England in comparison to graduate premiums overall, which have fallen everywhere apart from London.61 Other studies have shown that even within technologically driven businesses, there is a significant demand for critical and analytical thinking, problem solving, communications skills, creativity and flexibility.62 Given the advantages that AI is providing in numerous tasks, and the difficulties it may present in changes to the nature of work, we could expect to see soft skills and adaptability be favoured at an even greater premium, particularly when coupled with a technically skilled person to give it direction. 21

Learning Curves: Shaping small business growth through skills, education and training

Figure 8: Small businesses on which skills they think are important for their future growth Source: FSB Skills and Training Survey, July 2025 Net: Soft skills

81%

Communication skills

62%

Problem solving and decision making

58%

Net: Basic / intermediate / advanced digital skills

57%

Technical / job speciﬁc

54%

Teamwork

52%

Conﬁdence

49%

Planning and organisation

47%

Basic digital skills

41%

Literacy and writing

39%

Numeracy or ﬁnancial literacy

38%

Full driving licence

36%

Creativity

32%

Leadership and management

28%

Intermediate digital skills

27%

Net: Basic sustainability / specialist green skills

16%

Advanced digital skills

15%

Basic sustainability skills

14%

Specialist green skills

Languages

Other, please specify None of the above 0%

“The biggest skills gaps are often those softer skills for our business. We have a lot of software developers in the business who are highly specialised and technical, and we ask them to engage a lot with clients, so those communication skills are really important for us. We often provide coaching for them on those kinds of skills.” Data and Analytics firm, West Midlands fsb.org.uk

10% 7%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Overall, the salience of soft skills is not a new development. Skills such as leadership and management have been an area of concern for the British economy for decades. For instance, numerous economists and scholars credit the UK’s comparatively slow productivity growth in the midlate 20th century due to poor management practices which made British firms slower to improve their equipment and techniques.63 Other scholarship from the same period praised international 22

Learning Curves: Shaping small business growth through skills, education and training

companies opening offices in the UK, as that would help introduce more advanced approaches to management, and those practices would spill over into native British firms.64 This approach has grown in importance considering the ‘management as technology’ literature which found that management practices explain stronger firm performance and account for about 30 per cent of productivity differences- not just between countries, but also across firms within countries.65

“It would be really helpful for there to be training courses focused on management in construction. We do quite a few CITB [Construction Industry Training Board ] courses, which are helpful, but one focused on management skills would be particularly helpful, especially for subcontractors to learn them. I think it’s a missing link.” Carpentry firm, South East England Improving business leadership and management practices is an essential component for supporting growth, innovation, and the adoption of new technologies. Regardless of the Government’s defunding of degree-level management apprenticeships, which were overwhelmingly used by Growth and Skills Levy-paying firms rather than SMEs, there should be a greater focus on how to support business owners and managers to expand their firms. This can be seen by the fact that 28 per cent of firms believe leadership and management skills are important for future growth, with considerably higher rates among small and mediumsized businesses. Whilst existing policies such as Help to Grow Management (HtGM) do provide a good programme of 1:1 business mentoring and peer learning, its take-up is a third of the size that had been expected. Additionally, some of the execution has been patchier than the design - the proportion of SME leaders who created Growth Action Plans (GAPs) was lower than anticipated and fell short of programme targets (71% rather than 90%), and many businesses that had written a GAP have not implemented it.66 Furthermore, the mentoring suffered when it fsb.org.uk

transitioned from a paid to a voluntary model, and the recruitment for the programme chiefly runs through business schools which most SMEs have no prior relationship with. To improve on this, greater emphasis needs to be placed on carrying the policy to firms it was built for through intermediaries such as accountants, banks, trade associations and sectoral bodies (see Chapter 3), better reflecting the international evidence that these interventions work best when it reaches firms through their existing touchpoints.67 Additionally, the HtGM course should feature an implementation check-in on GAPs perhaps one to three months following completion, to support businesses in realising their learnings. It is noteworthy that specialist green skills register at just five per cent. While this may partly reflect the early stage of green transition across the economy it also should not be surprising. Despite the UK’s ambition to be a “clean energy superpower”68, we have the second lowest proportion of renewable energy jobs in the G7.69 Even coal-burning nations such as Italy and Germany have at least three times as many types of these jobs as we do. Nonetheless, green skills are worth monitoring closely as Net Zero obligations and supply chain pressures increasingly reach smaller businesses. Policymakers should expect this to become more important as Net Zero becomes more commercially relevant through the mass adoption of heat pumps, electric cars, and other new consumer technologies. We should also anticipate the prevalence of specialist green skills to vary depending on changes to the UK’s direction on energy policy, which could impact energy prices and emissions and therefore significantly impact the speed of electrification and British competitiveness.

Future skills needs and economic change Cultivating human capital through education, skills and training is inherently a long-term effort and therefore needs to broadly anticipate overarching changes in the economy which will see jobs change, new jobs introduced and old jobs replaced. Ensuring that small businesses in the decades ahead have access to proficient and productive labour is fundamental to realising stronger prosperity and living standards in the UK and ensuring that the UK remains a good place to do business.

Learning Curves: Shaping small business growth through skills, education and training

However, predicting future skills needs is impossible to do with any degree of detailed accuracy. It requires a vast number of assumptions about the make-up of the economy and the litany of factors that can impact that, such as migration, trade, energy and labour market policies. This can be miscalculated, for instance, the number of people that would make use of the free movement of labour in the late twentieth and early twenty-first century was hugely underappreciated, as well as the impact of technology on middle-wage occupations that were replaced or offshored in the last three decades.70 Therefore, when looking at future skills needs, they should be treated cautiously as forecasts with significant margins of error, rather than accurate projections. Looking ahead we should anticipate the following changes that will have long-term impacts on the labour market and therefore an impact on our skills needs. It is impossible to say to what extent a generalpurpose technology like AI and automation will have regarding displacing or augmenting jobs. Studies have yet to establish repeatable findings on this, and we do not know with any confidence how far agentic AI might go, as the complexity of tasks that AI agents can perform has doubled approximately every seven months.71 The UK could be particularly exposed, or well-positioned, given that around 70 per cent of UK workers are in occupations containing tasks that AI could potentially perform or enhance - a higher share than the US and other advanced economies at around 60 per cent, reflecting the UK’s servicesector-intensive economy.72 However, we should expect that AI will disrupt the labour market through augmentation - substituting cognitive and technical tasks, rather than ‘destroying’ jobs.73 For instance, technologies often perform tasks better than people, but they still require workers and leadership for direction, contextualisation and navigating human relationships. In effect, AI could see businesses place a greater premium on soft skills, and it is a change that we are already seeing among businesses which cite them as important for growth. Indeed, the automation of certain technical tasks will lead to businesses competing more explicitly for people that have good decision-making and problem-solving skills, creativity and organisational management, fsb.org.uk

and soft skills are projected to become a defining characteristic of a greater share of occupations in the future.

“I did a training course in the Swindon and Wiltshire Growth Hub, which was on automation and finding different ways to automate areas of your business. The course was a huge success, as it was not my strength. As a result, we have automated quite a lot of our business and I was able to reduce the need for one member of staff who worked in an admin role. I reemployed them in a different area of the business though, and improved efficiency in the business. That was absolutely amazing.” Podiatrist, South West England The transition to Net Zero also represents a profound shift for part of the British workforce in the years ahead. Decarbonising industry, energy, transport and the built environment will create substantial demand for new technical capabilities. From heat pump installation and retrofit construction to renewable energy engineering, we should anticipate these new technologies to overhaul technical capabilities over time. However, creating the skills base in the workforce to facilitate this adoption cannot be done ahead of the mass commercialisation of these green technologies. As we will see in our research below and in other research, businesses are currently not developing their employees in these Net Zero skills because it currently makes little commercial sense.74 This is especially true as the vast majority of vocational or technical qualifications have had employer input on the design and the scale of their provision, which will reflect the private sector needs and operations of the past or present rather than the future.75 Furthermore, the Net Zero agenda has led to the introduction of regulations that have also created new jobs to fulfil compliance needs that ordinary businesses must now engage with. Therefore, even outside of the immediate sectors engaged in decarbonisation, all firms will be expected to report and lower emissions and will require skills to navigate these requirements. 24

Learning Curves: Shaping small business growth through skills, education and training

What unites these broad forces reshaping the economy is that they each place a premium on adaptability, both in individuals and in the systems designed to develop the skills to meet them. Considering the future skills needs, there are also important differences between the “skills for use” and the “skills for understanding” ( judging accuracy of outputs, understanding risks, keeping information safe, discerning AI-generated content).76 Many courses and AI skills drives may be oriented towards the former, however, it is essential particularly given the unpredictable nature of how technology will develop that people and businesses have the latter foundational skills to use it as well. Similarly, the skills needs driven by new Net Zero new compliance requirements will create burdens for SMEs who cannot afford to hire consultative or monitoring staff and therefore force small firms to learn how to adapt. These approaches will be essential to people feeling confident and comfortable enough to exploit the benefits that economic change has to offer. No skills system can anticipate every disruption with precision and attempting to do so risks locking provision into the assumptions of today rather than the realities of tomorrow. The more important task is to build a workforce and a skills infrastructure that is inherently flexible, able to equip people with the foundational capabilities, critical thinking, problem solving, digital literacy, and ability to learn continuously, so new skills can retain their value across a wide range of possible futures. Despite that, small businesses are currently operating with modest training budgets, limited planning infrastructure and a skills system that does not meet their needs. Preparing the small business workforce for the changes ahead is therefore not simply a matter of forecasting which specific qualifications will be in demand in 2035. It requires a sustained, well-funded and flexible skills system that can respond to change as it happens, supporting businesses and workers to adapt continuously rather than expecting them to anticipate what cannot yet be known.

more ambitious still, such as a universal competency credentialing system that allows workers to have their abilities assessed against occupational standards and give SMEs confidence in the ability of their prospective employees. To support individuals in reskilling and upskilling, the funding architecture are also in place. The Lifelong Learning Entitlement is the principal instrument through which mid-career adaptation is meant to happen, and the Government has already accepted the principle by lifting restrictions on funding study at an equivalent or lower level, so that a graduate can be funded to requalify in a different field.77 The funding, however, is not sufficient. New learners receive an entitlement equal to four years of study, and prior study is deducted from it, which leaves a typical three-year graduate with around one year of residual entitlement to cover the remaining four decades of their working life, and those who took a four-year course with nothing at all. This is particularly important as graduates are most susceptible to task exposure from AI, much of whose entitlement is already spent.78 Additionally, devolution also offers an opportunity to help manage disruption. The forces set out above will not land evenly across the country or at the same time, and existing mechanisms such as LSIPs offer effective bodies for articulating the skills needs of employers and shaping training provision for employer needs. Through devolution this can be made more responsive, as 67 per cent of the £1.44 billion Adult Skills Fund (ASF) was devolved to 13 strategic authorities in 2025/26, rising to around 76 per cent in 2026/27.79 With strategic authorities now holding joint ownership of LSIPs with employer representative bodies, the ability to identify skills needs and funding now work together locally.80 Completing the transfer of ASF funding and delivery would further enable localities across England to respond to disruption as it emerges locally and align training provision with small and local businesses.

Some of the key foundations are being laid for this flexible system already through the UK Standard Skills Classification which is standardising the language of skills and organising them into different skill types. This could be built on for something fsb.org.uk

Learning Curves: Shaping small business growth through skills, education and training

RECOMMENDATIONS: The Department for Work and Pension and Department for Education should accredit the knowledge and skills that workers already have:

• Fund a subsidised fast-track recognition pathway in shortage sectors, covering UK ENIC statement costs and reducing experienced worker assessment fees.

• Instruct Skills England and Sector Skills Networks to develop structured bridging qualifications short, targeted top-up courses that allow workers to demonstrate aptitude against UK competency and regulatory standards without repeating training from scratch, modelled on Australia’s Trades Recognition Australia framework. The Department for Business and Trade should build on the successful Help to Grow Management scheme to reach more small businesses and equip firms to thrive in economic change.

• Commission intermediaries that small businesses already trust - accountants, banks, trade associations and Sector Skills Networks (see Chapter 3) - to recruit participants, replacing reliance on business school marketing as the principal route into the programme.

• Restore funded curriculum-trained mentoring for the programme. • Introduce an implementation check-in one to three months after completion, so that Growth Action Plans are reviewed and executed.

• AI should be incorporated into the course curriculum, and to Help to Grow Essentials, to enable businesses to confidently and responsibly utilise AI tools and agents in their operations. The Department for Work and Pensions should work with the Ministry of Housing, Communities and Local Government to give complete control to strategic authorities over Adult Skills Funding and require that their commissioning aligns with the recommendations of their Local Skills Improvement Plan. The Department for Education should raise the Lifelong Learning Entitlement lifetime cap from four to five years’ equivalent study.

• This should be done by uprating the headline entitlement to £48,950, so that workers who used entitlement earlier in life retain meaningful scope to requalify in their later careers. The Department for Work and Pensions should establish a Women in Trades Taskforce that is cochaired by a Minister and a Women in Trades Envoy.

• It should be modelled on the Women in Tech Taskforce, to increase female participation in trade occupations covering construction, installation and motor trades.

• The Taskforce should publish terms of reference and a membership drawn from employers, training providers and trade bodies within six months, particularly small business representation.

• The Taskforce should begin by gathering and consolidating an evidence base and target female entrepreneurship as an explicit focus. It should also report annually to Parliament against a published target for female apprenticeship starts and completions in shortage and non-shortage trades.

fsb.org.uk

Learning Curves: Shaping small business growth through skills, education and training

Chapter 3: T raining in the workplace Looking at training itself, our research finds a higher rate of employers undertaking training when compared to the Department for Education’s Employer Skills Survey. For instance, in our survey 68 per cent of small businesses who had employees reported spending money on staff training in the previous 12 months. In comparison, just 59 per cent of UK employers in 2024 had funded or arranged training over the previous 12 months for their employees.81

We can see that the vast majority of SMEs undertake some form of training expenditure, on average spending £1,810 per employee in the previous year. For many small businesses, they have made a considerably smaller investment. Indeed, just over a third (37%) utilise free courses, government funded training, or spend between £1-500 themselves, on workforce development.

Figure 9: Average per employee expenditure on staff training during the past year Source: FSB Skills and Training Survey, July 2025

26%

£1 to £500 16%

£501 to £1,000 13%

£1,001 to £2,500 7%

£2,501 to £5,000 £5,001 to £7,500

£7,501 to £10,000

£10,001+

Nothing, but have provided free training courses Nothing, but have provided Government funded training courses

9% 2%

None of the above 0%

fsb.org.uk

19%

10%

20%

30%

Learning Curves: Shaping small business growth through skills, education and training

Figure 10: Small businesses on the average amount of staff training undertaken in the past year, per staff member Source: FSB Skills and Training Survey, 2022 and 2025

16%

None

21% 4%

Less than a day

6% 9%

1 day

6% 10%

2 days

11% 21%

3-4 days

18% 15%

5-10 days

15% 8%

11-20 days

7% 12%

More than 20 days

8% 5%

Don't know

10%

15%

20%

25%

2025 2022

It is encouraging to see that the amount of training that has been undertaken has grown among SMEs since 2022, with a range of training provision of three to 10 days being the most frequently reported amount of training and development days. Additionally, the number of employers undertaking no training has fallen by five percentage points.

fsb.org.uk

Some of the largest increases have been at the highest ends of the distribution with the proportion of staff completing 11 to 20 days, or 20+ days of training growing by five percentage points. This represents a significant portion of working days per year of between five to 10 per cent.

Learning Curves: Shaping small business growth through skills, education and training

Figure 11: Types of training employees at small businesses have completed over the past year Source: FSB Skills and Training Survey, 2025 Job-speciﬁc training Technical skills training

Accredited industry-related courses

21% 8%

Personal development training Training in a key business activity Academic courses and qualiﬁcations

16%

Leadership / management training Basic digital skills training Intermediate digital skills training Advanced digital skills training 6% 3% 5% Basic skills training (literacy and numeracy) 0% 4% Specialist green skills training 1% 7% Other, please specify 5%

Basic sustainability training

45% 41%

33% 27% 28% 31% 25% 36% 21%

21% 17% 13% 15% 12% 23% 10% 11%

Net: Basic / intermediate / advanced digital skills training

47%

36%

Compliance training Induction for new starters

53%

35%

28%

10%

20%

30%

39%

40%

50%

60%

Small business employers Self-employed

The results from Figure 11 are consistent with those above, where we can see that businesses prioritise job-specific training as they see it as important for future growth. The compliance training is also significant though it is worth noting that much of this will be non-discretionary - health and safety, regulatory and legal requirements that businesses have no choice but to fulfil. The prominence of this category therefore potentially flatters the overall training picture somewhat, as it represents obligation rather than strategic investment. However, compliance training serves an economic purpose as well, in maintaining a healthy and productive and fair workforce resulting in better growth and better working conditions which supports staff and knowledge retention. fsb.org.uk

“We sent two staff members off for software training for our CAD (computer-aided design) package, they went on the course, and it was really successful. The delivery of the training was extremely good, even though it cost me an arm and a leg, but I didn’t have a problem with that as it worked. It took a guy who had no knowledge of CAD and mechanical design and turned him into a really good mechanical designer. It was the best thing we’ve done.” Technology manufacturer, East Anglia

Learning Curves: Shaping small business growth through skills, education and training

There are interesting differences between the selfemployed and small employers which reflect the nature of their respective workplaces. The salience of digital training among sole traders is interesting to note, likely overlapping with the higher response rate of training in key business activities. Many freelancers need to become proficient in things like digital marketing or the digitisation of accounts and taxes as part of their operations regardless of sector.

to be expected to some extent – sole traders do not have any staff to train, and they are older on average so the lifetime return on investing in training is lower. For someone who is self-employed, measures like workforce development plans and dedicated budgets can also seem like needless admin, as such actions serve teams and departments better. However, it is concerning that even though the self-employed have more certainty of a return on investing in their development compared to employers because they can be confident in retaining the benefits of training, self-employers are still not putting in place measures to support their own development.

Despite the results above about types of training, we can see that self-employed people are the least likely to have any form of workforce development infrastructure compared to SME employers. This is

Figure 12: Small businesses on what they have in place to support staff training Source: FSB Skills and Training Survey, July 2025

56%

In-house training

16% 33%

Access to an online training platform

22% 23%

A relationship with a training provider

11% 17%

A short-term workforce development plan A long-term workforce development plan A budget dedicated to training Other, please specify I don’t know

10% 13% 5% 13% 4% 5% 3% 4% 2% 20%

None of the above 0%

56%

10%

20%

30%

40%

50%

60%

Small business employers Self-employed

fsb.org.uk

Learning Curves: Shaping small business growth through skills, education and training

“The training we’ve undertaken over the last three months is almost 10 times what we’ve done previously, and that’s because we’ve found such a shortage in knowledge and understanding for certain aspects of the job. A lot of this has been through Cloud Access, an online training platform. It’s £8 per course and the students are learning more off these courses than attending a course elsewhere. It’s really cheap, good and effective. We’ve spent a lot of time trying to find reasonably priced courses.” Civil engineering and construction firm, South East England

Overall, however, there is a consistent picture in that many small businesses are training modestly, spending modestly, concentrating on immediate operational needs, and many are doing so largely without the formal structures that would enable more strategic, sustained investment in the skills their own survey responses identify as critical to their future. This graph shows what training SMEs are willing to pay for, frequently in response to specific operational and business needs such as technical and job specific training. Revealingly, this also reflects our data on recruitment challenges, where difficulties in recruitment due to candidates lacking job-specific skills were most frequently cited.

Figure 13: Small businesses on what training they are willing to invest in Source: FSB Skills and Training Survey, July 2025

Job-speciﬁc training Technical skills training Accredited industry-related courses

18%

Training in a key business activity

18%

Leadership / management training

Intermediate digital skills training Advanced digital skills training

Basic sustainability training Specialist green skills training Other, please specify

5% 5% 4% 3% 2% 5% 7%

24%

17% 12% 15% 14% 13% 13% 12%

16%

None of the above NET: Basic / intermediate / advanced digital skills training 0%

25%

22%

12%

Academic courses and qualiﬁcations

44%

32% 29%

21%

Personal development training

Basic digital skills training

44%

28%

26%

10%

20%

31% 31%

30%

40%

50%

Small business employers Self-employed fsb.org.uk

Learning Curves: Shaping small business growth through skills, education and training

This should be noted for policymakers that are planning for future skill needs, as businesses have no incentive to reskill their workforce unless it is commercially relevant for them. As we can see from the data on what training businesses have done and what they intend to do, it is most likely to be the kind that enables or improves an employee’s ability to perform in their current role, rather than training for a future role. It is comparatively much rarer for businesses to train an employee for a role that is not immediately applicable to them. Interestingly, businesses are much less willing to fund training in soft skills compared to job-specific or technical skills, despite more than 80 per cent of them earlier citing it as important for their future growth.

“I’m always happy to provide training in addition to the legal requirements if it’s something that is within the strategic view of where we’re taking the business. We are a very client business need driven company , and the main priority for me is the technical skills of my staff, and then I would also invest in developing the softer skills of my staff to be effective team members.” Food scientist consultancy, East Midlands The nature of soft skills makes their return on investment harder to attribute. When a business funds job-specific or technical training, the return is relatively observable and direct - a staff member gains a specific capability, applies it in their role, and the business benefits in a traceable way. With soft skills, the causal chain is much murkier. Improved problem-solving or confidence may make an employee more effective across everything they do, but a small business owner cannot easily point to a moment where the training has paid off. This ambiguity makes it rational to deprioritise soft skills funding even while genuinely valuing the underlying capabilities. This difficulty in measuring returns to soft skills training is well documented in the labour economics literature which examines the challenges of attributing productivity gains to non-cognitive skill development specifically.82 fsb.org.uk

Additionally, soft skills are often seen as pre-existing attributes or something that people should arrive with through prior experience and education, rather than trainable competencies. There is an embedded assumption - not unique to small businesses - that soft skills are largely fixed personality traits that people either have or don’t, rather than capabilities that can be systematically developed through training.83 On the question of whether it is the role of the state or businesses, scholars have noted this division of assumed responsibility as a structural feature of the English skills system, and one that creates persistent underinvestment at both levels precisely because employer and state each expect the other to act.84 Either way, if a business owner believes this, even unconsciously, they will be less willing to fund soft skills training. This may partly explain why recruitment remains the primary mechanism through which small businesses seek to acquire soft skills; they look for people who already have them rather than developing them in existing staff. In the event of an employer being willing to invest in soft skill development, the market for soft skills training is crowded and variable in quality. Technical and job-specific training comes with clearer accreditation and more legible quality signals through sector bodies and industry networks. Studies have consistently highlighted that small employers find the training market difficult to navigate and that information asymmetries disproportionately affect smaller firms without specialist procurement capability.85 This raises the effective transaction cost of purchasing soft skills training relative to technical training, even when the underlying need is recognised. Therefore, rather than a contradiction in the preferences for investing in different skills, we see a rational response to incentive structures. The attribution difficulty because of skill investment, provision opacity and settled assumptions about state responsibility combine to make funding soft skills training individually irrational for small businesses even when it would be collectively beneficial. This is a predictable market failure, and one that requires public intervention not just in funding but in how soft skills training is designed, valued and attributed to make the private return on investment visible enough to change behaviour.86 32

Learning Curves: Shaping small business growth through skills, education and training

Barriers and incentives to training employees

that employees leave their employers once the training has been delivered. Less than 20 per cent of firms say they face no barriers at all accessing training, although encouragingly for ethnic minorityled businesses, this was notably higher (25%). This is also reflected in responses to what would incentivise businesses to undertake more training; financial incentives and grants to help with training costs were the clearest demands for improving skills and training investment, as seen below. There are also encouraging results for the Government’s direction of reforming the skills system and the introduction of apprenticeship units, with significant portions of firms wanting more flexible and shorter length training opportunities.

Whilst there are numerous barriers to training, whether for permanent members of staff or new entrants like apprentices, the most frequently reported are resource and time related. For instance, the most cited barrier is that training is too expensive, followed by a lack of capacity in workplaces to create space for training or even to organise the workforce development in the first place. Additionally, increases in taxation and other costs have crowded out skills investment that businesses might otherwise have made, which correlates with figures reported above. Other barriers relate to an unavailability of relevant training, the quality of the training, or just the risk

Figure 14: Small businesses on the barriers to investing in training Source: FSB Skills and Training Survey, July 2025 Cut training due to increase taxation Training is too expensive

I have not had time to organise training Relevant training is not available locally Cut training budget due to non-labour costs increase Employees leave after being trained Quality of courses / providers is poor

14% 15% 5%

11% 6%

20%

16% 14%

8% 8% 9%

5% 6%

10% 11% 13%

None of the above NET: Increased labour / other non-labour costs

21%

6% 7% 7% 7%

Only online training available and prefer in person 3%

22%

20%

Unable to access online training

Other, please specify

27%

Not enough information on relevant training

Training is not a priority

28%

No relevant training available

All our staff are proﬁcient

30%

21%

Employees are too busy to undertake training Cut training budget due to labour cost increase

32%

29%

10%

15%

20%

25%

30%

32%

35%

Small business employers Self-employed

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Learning Curves: Shaping small business growth through skills, education and training

Another significant barrier is simply the awareness of, and confidence in, the training opportunities available, and as a policy problem it is likely underrepresented. For instance, 15 per cent of firms report that the quality of course providers is unsatisfactory and 20 per cent state that there is no relevant training available locally. This can be compounded if there is a lack of standardisation in the administration of training courses as there has been with apprenticeships, which can increase burdens and muddy the gains from workforce development. Training being perceived as too expensive or irrelevant may also capture instances where employers are doubtful of the financial return on investment, or what training is relevant to them. It should be remembered that employers are not strangers to making significant investments – it is a matter of confidence in the return that the investment will provide. It is unsurprising that large portions of small businesses would be incentivised to undertake training if they had more access to flexible training opportunities (22%) or improved course quality (21%).

“We tried one training provider first, but they weren’t good at communicating and so we moved onto our current provider, who are very good. The quality of the content some of the providers are running is a little bit weak and some of the trainers weren’t great.”

“We have a regular training plan throughout the year for all our staff to have professional development. We do find that if we send people out to external training providers, they’re wasting a lot of time because a lot of the course trainers aren’t up to standard. You might also not actually get six hours of training if you go on a course, it might just be a few hours because of the course design.” Hairdressing group, North West England The different results for the self-employed likely reflects a combination of different training needs and a degree of disengagement from the formal training market that means barriers are not consciously experienced because training is simply not being considered in the same way as employers consider it. Additionally, whilst large businesses can find efficiencies in their training provision as explored below, the inverse is true for the self-employed and therefore their returns on training are significantly lower. However, that is tempered by the fact that sole-traders will never face the disincentive of losing training investment to another business.

Property Maintenance firm, South West England

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Learning Curves: Shaping small business growth through skills, education and training

Figure 15: Small businesses on what would help them undertake more training Source: FSB Skills and Training Survey, July 2025

64%

Government grants towards training costs

47% 54%

More tax relief incentives

26% 28%

Greater availability of local training

22% 23%

Improved course quality

13% 23%

Better information, advice and guidance on the support available

19% 23%

More access to ﬂexible training opportunities

17% 20%

Clear access to online training Shorter length training opportunities Other, please specify

13% 18% 5% 8% 9% 14%

Nothing / none of the above 0%

30%

10%

20%

30%

40%

50%

60%

70%

Small business employers Self-employed

Coupled with the figures on the cost barriers of training, we can see among SMEs that there is an unambiguous view that grants and tax reliefs are the most powerful incentives to increase training. Though this could reflect a poor climate of corporate profitability, these results indicate that above all other challenges related to training, small firms want the economics of training to be improved. This distribution in other incentives also suggests that no single non-financial intervention stands out as transformative, but collectively they point to a market that is failing small businesses on multiple dimensions simultaneously - geographic accessibility, quality, flexibility and navigability.

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“Apprentices take a lot of time and cost. We’ve also found that when apprentices have passed their university degree, they jump ship to earn more money elsewhere. We’ve had about a quarter of apprentices not finish their course, a quarter that leave after they’ve finished their training and just half that stay loyal. We’ve tried retention clauses, but it doesn’t really work, and you can’t attract people into the apprenticeship.” Civil engineering and construction firm, South East England

Learning Curves: Shaping small business growth through skills, education and training

The barriers of in-work training therefore point towards a market failure that requires tax credits to unlock the benefits that workforce development can provide for economic growth.87 This argument is identical to the case for incentivising R&D activity, in which businesses underinvest because the social returns exceed its private returns, and they cannot capture those returns entirely.88 This is a greater consideration for skills as trained workers can move to other employers and competitors, and a tax credit would help socialise the training costs.89 Whilst this does present a new fiscal burden, it is a positive intervention that would add less friction to hiring and training decision. Some small businesses, for instance, have attempted to retain their investment into training through restrictions and negative measures like retention clauses but have phased these out after they created barriers to recruitment.

The incentive structures behind small business training decisions The patterns in training identified in our data reflect a broader deterioration in employer investment in skills. The Employer Skills Survey (ESS) shows that total training spending has fallen by 18 per cent, and investment per employee has fallen by 38 per cent. The proportion of firms providing any training has dropped from 66 per cent in 2017 to 59 per cent today.90 The same is reflected in Government, where public spending on further education has yet to recover in per-pupil terms from 2010 levels, despite some increases since 2020. Within this general decline, smaller firms behave differently. Smaller firms spend significantly more per learner and train a smaller share of their employees than larger ones, with training investment per employee among the smallest employers almost twice as high per trainee as among businesses with 100 or more employees. This is partly because small business training tends to be accredited, specialist and externally sourced, whereas larger firms can achieve economies of scale through internal provision that is broader but less intensive. 91 Additionally, larger businesses fundamentally have a significantly bigger pool of experience and skilled workers to draw on for training and mentoring opportunities, further negating external training. Consequently, the ESS shows that as businesses become larger, they fsb.org.uk

are more likely to train a greater proportion of their workers. The relative inability to economise training costs for SMEs, particularly small and micro businesses, has meant that training expenditure has fallen much less sharply than those of larger firms. This suggests that what smaller businesses do spend on is reactive and essential to their operations, whether professional certification, compliance, or job-specific technical skills as our survey results demonstrate.92 To induce more training investment among small businesses, the Government should consider the strong case for targeted tax credit. Given that SMEs train considerably less, and a significant proportion undertake no formal training at all, a targeted incentive would subsidise less existing activity and would be more likely to pay for genuinely new workforce development. Additionally, given the cost barriers to training cited in this chapter, small businesses are also likely to respond to tax credit, as more than 50 per cent of small employers have stated that this would help them undertake more training. Reducing the cost of training via a tax credit therefore would change the decisions of firms that are priced out of it, further creating additional training. Lastly, given that small businesses disproportionately recruit young people, those with lower qualifications and those furthest from the labour market, training investment would deliver a stronger economic and social returns relative to training better-educated workers. A targeted credit would therefore reach the employers with the least existing training to subsidise, the greatest responsiveness to cost, and the workers who stand to gain most from it. A second structural pressure on workforce development is the significant wage compression now underway in the UK economy, driven by successive above-inflation increases in the minimum wage alongside rising employer National Insurance Contributions. The training effects of this compression are an underappreciated consequence, particularly as the minimum wage is now worth over 80 per cent of median earnings in some parts of the country.93 Small businesses carry a disproportionate share of minimum wage employment, and therefore are the part of the economy where the training disincentives created by wage compression are 36

Learning Curves: Shaping small business growth through skills, education and training

most heavily concentrated.94 FSB’s own evidence to the Low Pay Commission confirms that these disincentives are now translating into observed cuts. Among small businesses whose wage bill rose because of the April 2025 NLW increase, 18 per cent reported cutting back on training expenditure to absorb the cost.

SMEs. Additionally, the training provision landscape is fragmented and opaque for firms to navigate confidently. Addressing this requires approach that restructures the financial incentive, improves the quality and navigability of provision, and builds the sectoral coordination that gives businesses confidence to invest.

This is because when a minimum wage is set above what a lower-skilled trainee can immediately produce, the firm cannot recoup its training investment before the worker either leaves or must be paid the full rate regardless. The result is what the theoretical literature calls a “low-skill trap”95 where a rising minimum wage leads to less training for low-ability workers and more for those of higher ability, concentrating training investment at the top of the skills distribution and withdrawing it at the bottom. In the UK for instance, a study on exploiting a discontinuity in apprenticeship minimum wage rules found that among compliant employers the minimum wage reduces training by between 11 and 23 per cent, a significant effect that is concentrated among young, lower-skilled workers who have the most to gain from investment in their development.96 For employees, the same compression dulls the individual worker’s incentive to invest - wage compression narrows the expected return to skill acquisition. 97

The success in this approach can be seen abroad. For instance, countries that have made the most progress in adult learning participation such as Ireland and Estonia have done so through longterm, institutionally embedded reforms that combine financial incentives, employer engagement and quality assurance.98 In the case of Ireland, they introduced Skillnets which serve as frameworks that bring employers, providers and government into structured relationships around skills.

None of this is an argument against a minimum wage. The benefits a wage floor provides are strong, but the training effects are an underappreciated side consequence that sits alongside the betterstudied labour market outcomes. When wage costs rise faster than productivity, particularly in the low-margin sectors, the rational response is to cut expenditure on anything that is not legally required. The risk, then, is a world in which lowpaid workers receive higher wages at entry but face systematically worse prospects for progression, because the employer’s incentive to invest in their development has been crowded out by the cost of employing them, and the worker’s incentive to invest in themselves has been dulled by the absence of a clear wage return. These two phenomena – minimum wage increases and high inelastic training costs for small businesses – compound each other, producing a structural tendency toward underinvestment into skills for fsb.org.uk

If this model was transferred to the UK, a national Sector Skills Networks programme, organised around specific industries and charged with streamlining provision, could address the barriers to training directly. Its primary function would not be to deliver training itself but to give businesses the confidence to invest in it by identifying highquality providers, enabling collective procurement at scale, and creating the industry-level coordination that makes training a shared commitment rather than an individual gamble. Ireland’s Skillnets has demonstrated that sector-level coordination can substantially increase employer training through a bottom-up approach that has created high levels of trust and ownership among businesses, particularly SMEs.99 Skills England is well-placed to establish this infrastructure in concert with the business community having assessed future skills needs and the LSIP infrastructure has mapped skill provision geographically. However, it should build on this through a national sectoral lens that can more effectively deliver business confidence rather than a fragmented regional or local approach. Whilst the Irish model suggests that the amount of funding needed might be considerable – potentially £800 million per year if you scale up the most recent Skillnets funding with the size of the UK’s workforce – much of this money provides subsidised training delivery.100 A British model potentially focused on brokerage, quality assurance and collective procurement does not require such 37

Learning Curves: Shaping small business growth through skills, education and training

costs. Furthermore, Sector Skills Networks could be introduced sequentially, launching in eight priority sectors identified by Skills England before growing to incorporate dozens of industries in later years as it develops traction with employers. This could then complement the skills landscape which is being devolved and localised within England by accrediting providers and aggregating demand nationally within each sector. This would then supply a sectoral organising capacity that place-based approaches lack, enabling combined or local authorities to expand quality-assured training provision. However, improving the institutional landscape will not be sufficient on its own if the underlying economics of training investment remain stacked against small firms. In recent years, rising business costs have crowded out discretionary workforce development investment, particularly in the absence of clear financial returns. These factors point towards the need to establishing tax credits to incentive more training investment.

The case is identical to the rationale for introducing R&D tax credits where businesses underinvest in training because the social returns exceed the private returns. A training tax credit would help socialise investment costs, so that a greater proportion of their investment is gains are retained when they upskill their workforce. Critically, it needs to be designed to drive additional training rather than subsidise what firms would have done anyway. This can be achieved through targeting it at external, accredited provision, capping it to exclude activity already covered by the Growth and Skills Levy and Skills Bootcamps, and setting the threshold at a level that reaches the small businesses where the market failure is most acute. A tax credit also offers an opportunity to engender a culture of training investment through a loyalty incentive by providing an enhanced rate of credits for firms that claim for three consecutive years. This would help achieve a sustained commitment to training by generating behavioural habits.

RECOMMENDATIONS: The Department of Work and Pensions and Skills England, working with the Ministry of Housing, Communities and Local Government, should establish a national system of Sector Skills Networks.

• These Networks will be industry-led bodies that support employers in identifying high-quality training providers and courses, broker and streamline training for their sector, and assemble cohorts across employers and regions. It should be operational across all sectors in five years.

• Whilst these Networks should operate as national entities, they should maintain a regional presence in each strategic authority, providing sectoral representation and working with LSIPs and devolved governments in driving improvements in workforce needs for their respective industries. HM Treasury should introduce an SME Training Tax Credit.

• This tax credit should apply only to training delivered by an external accredited provider, where the Government covers 20 per cent of the training costs for firms with an annual payroll of less than £1 million, to be uprated with CPI each year.

• The value of claims should be within £500-£20,000 and cannot be claimable for training provided by the Growth and Skills Levy, Skills Bootcamps, and other Government training subsidies.

• Businesses that claim the credit for three consecutive years should receive an enhanced rate of 25 per cent rather than 20 per cent in year four and beyond. This rewards sustained commitment to training investment, builds habits, and incentivises training that would not otherwise take place.

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Learning Curves: Shaping small business growth through skills, education and training

Chapter 4: Apprenticeships Following several years of the Apprenticeship Levy being oriented towards large businesses and the upskilling of older workers as opposed to work-entry and non-levy payers, the Government has rightly reoriented apprenticeships towards young people and SMEs.101 The package of reforms to the Growth and Skills Levy – the incentive payments, removing co-investment payments for young apprentices – will materially lower the costs and risk for businesses hiring young apprentices. Additionally, we warmly welcome the Government’s introduction of a bursary to remove financial barriers to apprenticeships for children by addressing the Universal Credit child element.102 This clawback has impacted lowerincome families when considering leaving full-time education to start an apprenticeship, and in case their household is made worse off.103 Moreover, we welcome the piloting of the Mayoral Strategic Authority brokerage services to not just introduce a clearing system for apprenticeships, but to serve as an aggregator of employers, training providers and candidates and improve the ease of matching people to opportunities. These policies signal serious intent to shape apprenticeships in a more favourable direction for SMEs and will likely bring many small businesses forward to hire an apprentice for the first time, and to increase the quantity of apprentices they hire going forward. Until recently, the Apprenticeship Levy reforms from 2017 saw the demographic and level profile of apprentices shift substantially. In 2017/18, intermediate and advanced levels accounted for a similar share of starts (43% and 44% respectively), with higher level at just 13 per cent. By 2024/25, higher level starts accounted for nearly 40 per cent of all apprenticeship starts, while intermediate had fallen to around 19 per cent.104 Degree-level starts at Level 6 and 7 rose to 60,350 in 2024/25, representing 17.1 per cent of all starts. While Advanced Apprenticeships have remained healthy, and early data from 2025/26 suggests they are becoming more numerous, it is still below its peak from 2016/2017. Overall, the Apprenticeship Levy system moved upward in the following respect - the fsb.org.uk

qualification level, the age of participant, and the size of employer most likely to offer them. As a result, total starts fell significantly after 2017, a decline the Government and many experts have attributed to quality improvements, but also because apprenticeship standards were, until recently, more numerous at higher Levels and thus provided more choice for older workers in larger firms. Correspondingly SMEs were deprioritised by having fewer options at low Level apprenticeships.105 The consequence of this shift is that apprenticeships are increasingly less likely to serve young people entering the labour market for the first time. Over half of all apprenticeship starts in 2024/25 (51.3%) were for apprentices aged 25 and over, while under-19s accounted for just 21.2 per cent of starts.106 The Government’s ambitions to rebalance apprenticeships towards young people will therefore likely reverse the trend in apprenticeships being undertaken by older workers at levy-paying firms, and see non-levy SMEs facilitate significantly more young apprentices. This is because the age distribution of apprenticeships overall and the age distribution among small business apprenticeship hires are inverted. Where the national picture shows a majority of starts among older workers, our survey data shows that 80 per cent of small businesses that hired an apprentice in the last three years did so from the 16-24 age group, with 19- to 21-yearolds most frequently. This is consistent with wider evidence - prior to the levy’s introduction, it was SMEs that accounted for most of the recruitment of younger apprentices. Small businesses are, in other words, the natural home of young apprentices, offering entry-level occupations undertaking lower-level qualifications, and with the job roles that map most directly onto school and college leavers taking their first steps into work. It is no coincidence that the collapse in young people undertaking apprenticeships coincided with a drop in SME participation of 49 per cent from 241,000 in 2016/17 to 123,800 in 2020/21, compared to a 14 per cent fall in large firms over the same period.107 39

Learning Curves: Shaping small business growth through skills, education and training

Figure 16: Small businesses that have hired apprentices in the last three years on the age of their apprentice at hiring Source: FSB Skills and Training Survey, July 2025

44%

16 to 18 years old

54%

19 to 21 years old

21%

22 to 24 years old

24%

25 to 49 years old

11%

50+ years old 0%

10%

20%

30%

As mentioned above, SME apprenticeship hiring is overwhelmingly concentrated among younger age groups, and for the small firms that do hire apprentices (28% of enterprises we surveyed) it

40%

50%

60%

is a significant recruitment tool for new entrants in their businesses. SMEs are far less likely to use apprenticeships to upskill their existing staff compared to large firms.

Figure 17: Small businesses that have hired apprentices in the last three years and what levels of apprenticeship they hired Source: FSB Skills and Training Survey, July 2025 Intermediate (Level 2 – equivalent to ﬁve good GCSE passes)

43%

Advanced (Level 3 – equivalent to two A-level passes)

30%

Higher (Level 4-5 – equivalent to foundation degree and above)

18% 11%

Bachelor’s Degree (Level 6) Master’s Degree (Level 7)

7% 17%

I don’t know

64%

NET: Level 2-3 30%

NET: Level 4-7 16%

NET: Level 6-7 0% fsb.org.uk

10%

20%

30%

40%

50%

60%

70% 40

Learning Curves: Shaping small business growth through skills, education and training

Unsurprisingly, the frequency of lower levels of apprenticeships reflects the age of apprentices that are being hired, and provides further evidence that SMEs find Advanced apprenticeships suit their needs best and are using it as a path to take on labour market entrants. The low rates of higher or degree level apprenticeships are notable given the significant policy investment that has gone into expanding higher and degree apprenticeships in recent years and raises questions about whether this expansion has primarily benefited larger employers. The relatively high cost and administrative burden of degree apprenticeships, combined with the longer time for completion and slightly more weekly off-thejob hours make them less accessible for many small firms regardless of their skills ambitions.

Read in the context of the reforms to the Growth and Skills Levy and new Apprenticeship Units, it is clear what small businesses want from the apprenticeship system, not generic qualifications but directly transferable skills and knowledge that it relevant to what their business does. We saw in Chapter 3 that job-specific training was the category employers were most willing to fund, so this finding is consistent - small businesses engage with apprenticeships for the same reason they engage with any training, for a direct commercial value.

Figure 18: Small businesses that have hired apprentices in the past three years on what type of apprenticeship they offered Source: FSB Skills and Training Survey, July 2025

44%

A qualiﬁcation that is relevant to my sector Management and administration

13%

Marketing

12%

Digital

Sales and retail

Customer service

Finance and accounting

Green / sustainability

Creative and design

Human Resources

Procurement

Legal

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10%

20%

30%

40%

50%

Learning Curves: Shaping small business growth through skills, education and training

Figure 19: Small businesses on what barriers they face when hiring apprentices Source: FSB Skills and Training Survey, July 2025 Paying wages

28%

Paying for training and assessment costs which are not covered by the Government

22%

Management time

22%

Dealing with paperwork / administration

21%

Finding a relevant apprenticeship qualiﬁcation

17%

Apprentice recruitment process

15%

Finding a training provider

13%

Requirements for time spent on off-the-job training

12%

Previous apprentices left after ﬁnishing training

10%

Previous apprentices hadn’t ﬁnished training

Finding helpful information and guidance

The current 12-month minimum rule

Issues with End Point Assessments

I don’t need to hire apprentice(s)

27%

Other, please specify I don’t know There are no barriers to hiring apprentices

19% 2% 7%

NET: Previous apprentices hadn’t ﬁnished / left after ﬁnishing training 0%

Looking at the barriers, we can see that many SMEs would like to take advantage of being able to hire apprentices – just 27 per cent of employers responding to our survey state they do not need to hire one – but cost, time and complexity form a significant barrier to doing so. These hurdles reveal why apprenticeship uptake is low among small businesses. The minimum wage for apprentices has increased substantially in recent years, which is welcome fsb.org.uk

15%

10%

20%

30%

from an apprentice welfare perspective and may incentivise more apprentices to complete their courses rather than seek other jobs. However, it has a direct impact on the economics of hiring for small businesses, particularly in the early months of an apprenticeship when productivity is lowest and supervision costs are highest. This is why it is fundamental that employers continue to be exempt from Employer NICs for young apprentices.

Learning Curves: Shaping small business growth through skills, education and training

“It doesn’t make commercial sense for small businesses to be taking on apprentices, but we do it because we believe it’s important and I can’t imagine not taking on apprentices. However, I don’t know if there will come a point when it just becomes too expensive.” Heating engineering firm, South West England “Labour costs are so high, we cannot afford to employ an apprentice in the salon now. It’s a really difficult situation because we used to take on two apprentices for each stylist we have, so we had 12 stylists and would take on 24 apprentices. In the last four years, this dropped to two apprentices, and we’ve decided we’re not going to employ any apprentices at all this year… The amount of training we’ve done has decreased recently because we can’t afford to shut the salon. We used to shut the salon about four times a year for full training days for the whole team, but we don’t shut the salon at all now. We’ve had to cut back on that type of training because of cost” Hairdressing group, North West England Furthermore, the challenges of management time, paperwork and administration fall disproportionately on small businesses where there is typically no dedicated HR or training function and where the burden falls directly on the owner or a senior member of staff. This is important to note for the introduction of the Apprenticeship Units, as the challenges around finding relevant apprenticeship qualifications and providers point to supply-side failures that sit alongside cost constraints.108 Additionally, the decision to exclude the self-employed and sole traders from public Apprentice Unit funding

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represents a structural gap that disproportionately affects most SMEs.109 A contributing issue is also the name for this policy. Apprenticeship Units do not effectively convey what they are to businesses and should be renamed to something colloquial such as Short Courses. This would more greatly entice more small employers to participate in training schemes, particularly if they are not hiring apprentices already. The training provider market similarly appears to be failing some small businesses, whether through geographic gaps, sector coverage or quality concerns consistent with previous questions. Anecdotally, we have also heard that training providers find dealing with large businesses much easier and profitable than small businesses, resulting in little incentive to support SMEs. However, recent reforms reducing the time required to update apprenticeships standards should help address some of this, and hopefully the introduction of Apprenticeship Units will provide employers with more choice and flexibility to take advantage of more relevant qualifications.

“There has been a lot of paperwork with some of our apprentices. During Covid, the local college had to go paperless which was really good, but as soon as lockdown ended, all the paper came back again…. This made onboarding apprentices a lot more difficult, we were being sent pieces of paper that had to be scanned and sent back…None of the training providers use the same system either… As an employer, it’s really hard to track the return on investment when everyone is using different processes, through a different system. It’d be helpful for Government to digitise everything and standardise the processes – such as onboarding forms, tracking the off the job hours and different assignments of the apprentices – which could all be linked to the online apprenticeship portal to make it easier and simpler for employers to engage with.” Data and Analytics firm, West Midlands

Learning Curves: Shaping small business growth through skills, education and training

“Training providers are very hit and miss, we only have one option. I’ve spent many hours trying to get the very best education for our apprentices, but there have been days where the apprentices have reported back that they’ve been sat in front of television or taught by someone other than their tutor, because there isn’t a tutor to teach them. I don’t think the institutions are regulated enough and often they take on board a lot of apprentices because it’s money in the bank, then realise that they don’t have the staff to teach them.” Heating engineering firm, South West England “For the on the ground qualifications, we’ve struggled to find the right training provider because there are so many courses and it’s overwhelming to know which is the right one.” Civil engineering and construction firm, South East England

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These provider-side frictions are compounded by the lack of an intermediary service in the apprenticeship system that aggregates SME demand and connects it to candidates, providers and funding in a coordinated way.110 Large employers solve this problem internally through HR functions, graduate schemes and established provider relationships; small businesses do not have that option and must navigate recruitment, provider selection, Apprenticeship Service setup and onboarding in isolation, on a per-hire basis. A 2024 evaluation of the DfE’s £2.5 million SME Apprenticeship Brokerage Pathfinder found that starts came in well below projections and concluded that alternatives should be explored, with eligibility gates, narrow sectoral scope and broker-provider competition all identified as design weaknesses.111 The £140 million Mayoral Strategic Authorities brokerage pilot announced in early 2026 is a welcome recognition that action is needed.112 A successful example of an employer-led intermediary model that aggregate both sides of the market within a synchronised recruitment cycle have shown promise. Workplus, operating in Northern Ireland since 2019, has supported 5,500 young people into apprenticeship applications with over 100 employers by running a shared twice-yearly campaign, a single candidate application pool, and employer-facing support that removes much of the administrative set-up that currently deters small firms.113 This approach of aggregation, synchronisation and shared candidate infrastructure has many features of what a properly designed SME intermediary service in England could replicate.

Learning Curves: Shaping small business growth through skills, education and training

Figure 20: Small businesses on what would encourage them to hire an apprentice in the future Source: FSB Skills and Training Survey, July 2025

39%

Reintroduction of the £3,000 incentive to hire apprentices Support with apprenticeship pay

34%

Government fully funds apprenticeship training costs

33% 22%

Increased Employer NICs exemptions Reduced paperwork / administration

19%

More relevant apprenticeship qualiﬁcations

18% 15%

Better training providers

16% 19% 13% 11% 12%

Better information, advice and guidance Improved course quality More ﬂexibility in apprenticeship delivery

Shorter apprenticeships

New foundation apprenticeships

Better access / support with apprenticeship levy transfers

Make End Point Assessments more straightforward

5% 7%

Other, please specify

I don’t know Nothing – I don’t plan to hire apprentices in the future 0%

59% 49%

42%

35% 27%

18%

14% 14%

11% 13%

11%

4% 4% 29%

10%

20%

30%

40%

50%

60%

Small business owners Small business owners who’ve hired an apprentice in the last three years

But more than the need for intermediaries, the fundamental economics of apprenticeships have long worked against small businesses. If the Government wants more SMEs to deliver apprenticeships, and for those apprenticeships to benefit young people — particularly those who are NEET — small firms need a substantive redistribution of the financial burden if their behaviour is to change. Encouragingly, many recent reforms move firmly in this direction. We warmly welcome the commitment to cover 100 per cent of co-investment costs for young fsb.org.uk

apprentices at SMEs, alongside the introduction of short courses and shorter apprenticeships, which together help close the supply-side gaps identified above. Additionally, the recently announced review into apprenticeship funding bands offers an opportunity to increase the provision of lower-level apprenticeships through more generous funding.114 Taken together, these changes and new incentives have begun to rebalance the immediate cost of taking on an apprentice and mark a genuine shift in how the financial burden is shared between the state 45

Learning Curves: Shaping small business growth through skills, education and training

and the employer. This would also offer a significant return for the taxpayer. Government studies of the previous system of apprenticeship frameworks have shown that Level 2-3 apprenticeships provided the strongest ROI compared to higher level ones, through wages, supporting employment and productivity gains.115 Even so, policy must go further to ease the recruitment and administrative burden that small firms face with apprenticeships. The recent

deterioration in small firms’ finances has made cost a sharper concern than it was in 2019, but cost has never been the only, or even the largest, barrier. In Fit for the Future, we found that the most frequent challenges to employing an apprentice were recruiting an apprentice (55%) and management time (32%), both ahead of paying apprentices’ wages (20%) among SMEs that had hired an apprentice in the past.116

RECOMMENDATIONS: The Department for Work and Pensions and Skills England should:

• Replace the current multi-step setup process of apprenticeships with one combined authorisation. – Currently, an SME taking on an apprentice must sign an ESFA employer agreement, separately add a training provider to their account, then click through a permissions screen and toggle each permission on individually.

– This should be collapsed into a single authorisation that the employer signs once, which automatically grants providers the standard permissions to create cohorts, reserve funds, manage cohorts, and recruit on the employer’s behalf with the option to opt out. This would reduce setup from a dozen steps to two: verify identity, sign the authorisation.

• Make training providers accountable for how well they support small employers, not just for delivering training.

– The Apprenticeship Provider and Assessment Register (APAR) is the list of providers approved to deliver funded apprenticeships, and it is a precondition for receiving any funding.

– Skills England should set a small-employer engagement standard, covering things like onboarding speed, responsiveness, and survey feedback from SME employers. Providers who fall below the standard would keep their existing levy-paying customers but couldn’t take on new non-levy SME employers until they improve.

• Establish regional apprenticeship brokerage services across England. – This should be modelled on Workplus where businesses can find and recruit apprentices and excellent training providers. It should be run through Mayoral Strategic Authorities (MSAs), with a parallel offer in other strategic authorities.

– It should be a service that aggregates SME demand, pools local training providers, runs synchronised cross-employer recruitment campaigns, maintain a shared candidate pool, and handle the Apprenticeship Service setup and provider-matching that small firms cannot easily do alone.

• Introduce an apprenticeship trial period. – This allows businesses to delay administrative onboarding until an apprentice candidate has got through their trial period, so that both the employer and apprentice is committed to the course. This can support businesses by pushing back administrative hurdles in case apprentices leave shortly after starting.

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Learning Curves: Shaping small business growth through skills, education and training

• Set up a single digital dashboard for employers to manage apprenticeship records through the apprenticeship service, rather than multiple provider portals.

– This will enable employers that have apprentices with different providers much easier to track the progress of their apprentices.

• Provide greater flexibility with how ‘off the job’ hours are logged and evidenced which would reduce admin burden considerably.

– This should also be accompanied by standardised guidance on what counts as being ‘off the job’, so small employers are not at the mercy of varying interpretations from different training providers.

• Increase funding bands for Intermediate, Foundation, and Advanced apprenticeships. – This will make lower-level apprenticeships more commercially viable for training providers, so nonlevy paying businesses can access a stronger supply of apprenticeships and improve cohort viability. The Department for Work and Pensions should:

• Introduce £250-£750 completion premium payments to non-levy payers where an employee or business owner undertakes and successfully completes an Apprenticeship Unit.

– Whilst we are pleased to see that apprenticeship units will be fully funded for SMEs, completion payments will help address the lack of investment into workforce development and the take up of units now they have been introduced. Payments can differ in size depending on the time required to complete the apprenticeship unit. One month for £250, two months for £500, and three months for £750.

• Rename Apprenticeship Units to be ‘Short Courses’ to improve legibility among SMEs and improve take-up.

• Extend eligibility for Apprentice Units (renamed to Short Courses) funding to the self-employed and sole traders.

• Extend the new apprenticeship bursary to households in receipt of Child Benefit, not only those receiving Universal Credit.

– This will guarantee that no family receives a financial penalty for their household undertaking an apprenticeship.

– This should be done by providing bursaries up to the age of 20 to cover Child Benefit clawbacks, so that families with young people pursuing apprenticeships are not worse off as seen with Further Education Courses and A Levels.

• Department for Work and Pensions and HMRC should introduce an employer notification duty, modelled on what HMRC does for tax-relevant changes.

– When a small employer registers a PAYE scheme, registers a new employee under 25, or interacts with Jobcentre Plus to advertise a vacancy that an apprentice could fill, DWP automatically surfaces the relevant incentive eligibility, including a personalised cashflow timeline showing when payments would arrive.

• The Department for Transport and the Department for Work and Pensions should fund a travel subsidy for apprentices under 25 to use public transport. This should cover buses and railway travel.

• HM Treasury should maintain the NICs exemption for employers hiring an apprentice under the age of 25.

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Learning Curves: Shaping small business growth through skills, education and training

Skills England should:

• Introduce an apprenticeship standard for managing AI agents, so that small businesses are equipped to supervise agents in line with best practice.

– The standard should cover AI evaluation and feedback loops, and skills for supervising and working alongside AI.

– The standard could then be used to develop a specific Apprenticeship Unit/ Short Course for managing AI agents, as well as being integrated into other apprenticeships.

• Issue guidance to make apprentices, not employers, responsible for routine ‘off the job’ hours recording, with employer sign off at key intervals only.

– Currently, many providers require employers to approve ‘off the job’ hours weekly or fortnightly which consumes significant management time for small employers, particularly those with multiple apprentices across different providers. Employers sign off on these hours should only be retained for agreeing training plans, when actual ‘off the job’ hours fall below planned hours, and at progress reviews.

• Require training providers to publish the number of non-levy paying apprenticeships they have enrolled and achieved.

– This will help monitor and hold providers accountable for how they engage and support employers of all sizes, and how they are preparing and helping apprentices.

fsb.org.uk

Learning Curves: Shaping small business growth through skills, education and training

Chapter 5: S upporting young people into the world of work – T Levels, careers advice, and work experience Strong engagement between employers and educational institutions services a vital function for students and businesses alike. For young people still in education, early exposure to the world of work is one of the most valuable investments that can be made in their future. Whether through careers advice, work experience placements, T Levels, or apprenticeships, structured engagement with employers during the school years helps young people make more informed choices about their learning pathways, develop practical skills, and help them compete in the labour market. It also provides businesses with a stronger pipeline of talent that arrives curious, motivated, and with at least some grounding in what working life involves. Providing work experience and placements gives businesses a low-risk way to assess potential future hires while shaping talent around their own processes, culture, and values from an early stage. An effective example of this route is the new T Levels. Unlike academic routes, technical qualifications such as T Levels have been designed in direct collaboration with employers and include a substantial industry placement as a core component, and the combination of on-the-job training and offthe-job study reinforces learning through practical application. Pupils can apply what they are learning almost immediately, which supports both skills retention and employer confidence in what young recruits know.

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“We’ve used T Levels as a recruitment strategy, and I’ve been recommending it to small businesses. You try really hard to recruit people, so we’ve built a relationship with our local colleges that are offering T Levels, and we’ve taken on student placements in building services engineering and engineering and manufacturing. In September we had two students with us on industry placements and now we’ve taken them on as Level 3 electrotechnical apprentices. Having a student for 45 days is a real opportunity as it’s a very long interview, so you get to see what they’re like in the workplace. Equally the student gets to see what your industry and workplace is really like so are more likely to make an informed decision about a job and stick to it. The rules for industry placements have recently changed so for an SME it’s even easier to engage with T Levels now because you can get involved even if you can only offer a much shorter placement.” Building engineering firm, South East England

Learning Curves: Shaping small business growth through skills, education and training

Figure 21: Small business engagement with education/welfare institutions in the past three years Source: FSB Skills and Training Survey, July 2025 Engaged with education institutions

31%

Provided work experience / internships to students

28%

Undertaken management training, including Help to Grow: Management

11%

Engaged in qualiﬁcation development

10%

Engaged with the Careers and Enterprise Company / Careers Hubs

Attended Skills Bootcamps (England only)

Engaged with Jobcentre Plus

Engaged with Local Skills Improvement Plans (England only)

Engaged with education organisations, such as Young Enterprise or The King’s Trust

Hosted T-Level industry placement(s) (England only)

Engaged with the National Careers Service

DigitalBoost support (e.g. grants) (Scotland Only)

14%

Academy Programme (SWAP) (only England or Scotland) 0% 0%

But more than work experience, it is also important that the foundation laid within the curriculum itself, which could support greater work readiness and improve employer engagement. When young people arrive already equipped with a basic grasp of how working life, pay, and enterprise function, they are better prepared to thrive in the workplace. Echoing the Interim Report of the Milburn Review, the Department for Work and Pensions found that

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10%

15%

20%

25%

30%

35%

teachers want much more focus on preparing young people more for employment, including a greater emphasis on soft skills.117 Within this, there should be a significant emphasis of financial and enterprise literacy within the curriculum, to ensure every pupil, regardless of school or background, leaves compulsory education with a baseline understanding of budgeting, tax, credit, and how businesses operate.

Learning Curves: Shaping small business growth through skills, education and training

Despite the benefits of businesses engaging with education described above, the extent to which businesses actively engage with vocational learning varies considerably. Our survey findings shed light on current levels of business engagement with schools, the provision of careers advice, and the availability of work experience opportunities, highlighting both areas of good practice and where more support may be needed. Among the businesses that we surveyed, we found most firms (57%) have engaged with at least one part of the educational, skills, or welfare system in some form over the last three years. As can be expected, much of this was limited in commitment of resource, such as engaging with education institutions or providing work experience and internships. Nonetheless, with 43 per cent of small businesses not engaging at all is a considerable figure, especially when considering how many employers invested in workforce development in the previous year. Given that SMEs provide over half of private sector employment, and that most young people will seek work, their lack of engagement represents a substantial untapped resource for improving the prospects of young people and businesses. This could reflect difficulties in businesses engaging with institutions due to a lack of standardised and easy points of access, and how relatively new many of the recent training programmes are. Skills bootcamps, careers hubs, and T Levels are all still taking time to bed into the business community, and therefore many firms are not familiar with these services.

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The Careers and Enterprise Company (CEC) engagement figure of just eight per cent is, however, a significant concern given the CEC’s specific mandate to connect employers with schools and young people. The CEC was established precisely to broker the kind of relationships that 31 per cent of small firms are already forming independently, yet its reach into the small business population remains limited. This gap between the direct engagement figures and the CEC figure suggests that small businesses are finding their own routes into schools and colleges without the benefit of the structured support, quality assurance and scale that the CEC is designed to provide. This represents both a missed opportunity as these businesses could be doing more, and perhaps better with CEC support. This poses a design challenge for the CEC itself, whose engagement model may not yet be sufficiently accessible or visible to smaller employers.

“Universities and colleges don’t seem to target the SME community for engagement, even though we are the majority of businesses in the UK. There is a big information gap and this needs to be fixed. There needs to be better relationships established, better communication channels and understanding too, which will improve take up in the SME community. There is a very big market for work experience there, but it’s not being properly managed or marketed.” Management consultancy, South East England

Learning Curves: Shaping small business growth through skills, education and training

Figure 22: Small businesses on what would encourage them to increase their engagement with educational institutions Source: FSB Skills and Training Survey, July 2025

A ﬁnancial incentive

34%

A clear point of contact

27%

Clear information, advice and guidance

25%

More opportunities to engage

17%

Positive community impact/brand reputation Increased ﬂexibility in ways to engage (e.g. hybrid or remote options)

16% 16%

Other, please specify

An intermediary body for coordination (e.g. CEC Companies Careers Hubs)

Access to training on best ways to engage

I don't know

None of the above - I already engage with education institutions None of the above - I am not interested in engaging with education institutions 0%

10% 19%

We can see that there is a substantial amount of interest among SMEs in engaging with educational institutions, perhaps partly stemming from the challenges firms have faced in recruiting good candidates. This could also reflect that these results are drawn from an education and skills survey and therefore would receive higher interest levels and engagement from interested businesses as a result. Nonetheless, financial incentives, simplicity and standardisation are needed to enable greater small business engagement with education.

10%

15%

20%

25%

30%

35%

to absorb the opportunity cost of time-consuming engagement, but it is a finding that sits in some tension with how employer engagement with education is typically designed and funded. Most programmes, including the CEC’s, are built around the intrinsic motivations of employers: community contribution, talent pipeline, brand reputation. The data suggests these motivations exist but are strained by resources; the primary ask is for the engagement to make financial sense.

The recurring theme throughout this survey of financial incentives is not surprising for businesses operating on tight margins with limited capacity

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Learning Curves: Shaping small business growth through skills, education and training

“The Employer Support Fund is vital for T Level industry placements. It’s enabled us to buy tools specifically for the T Level students, which we’ve got them to use throughout their placement. We’ll keep those tools and use them again for more students. Which is value for money from the college’s point of view, and we also got funding for the components for the control panel build project we ran.” Building engineering firm, South East England There is little indication that this might become more viable for businesses. For instance, the Work Experience Guarantee is expected of schools from September 2026, carries weight with Ofsted, and is expected to become statutory, but as of now there is no confirmed national funding mechanism for it, and it still lacks a legal footing. Without additional resource or simpler engagement, there is a risk that this policy ambition is never met, and greater emphasis is required in the role of incentives to bring more businesses forward to facilitate work experience, and for schools to consider employment outcomes. We therefore echo Alan Milburn’s efforts to draw greater attention to how schools are rewarded based on qualifications rather than outcomes, particularly as the UK has among the lowest work experience participation in the OECD.118 Otherwise, a clear point of contact (27%) and clear information, advice and guidance (25%) together represent a navigational ask that is almost as cited as the financial one. Many small businesses do not know how to engage with schools, colleges and universities in a structured way - who to call, what to offer, what is expected of them, what the process looks like. This is precisely the coordination

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gap that the CEC were designed to fill, yet as we have seen above, only eight per cent of small businesses have engaged with it. The prominence of these navigational asks suggests the CEC’s offer is either not reaching small businesses or not being communicated in terms that resonate with them, a notable challenge for an organisation whose core purpose is exactly this brokerage role. Read alongside Figure 21, the picture that emerges is of a large group of small businesses that are willing in principle, engaged in practice through direct relationships, but not yet connected to the formal infrastructure designed to support and scale that engagement. Closing that gap is one of the most tractable opportunities in this research, and one where relatively modest investment in financial incentive, navigational clarity and effective communications and marketing could yield significant returns for young people and businesses alike.

“We’ve never known about the employer incentive or Employer Support Fund for taking on T Level industry placements. I was speaking to my contact at the college, as we have students coming for placement soon, and I mentioned we were short on laptops. She said there is a fund available, but when my business partner went on the government website, she struggled with it and just thought that it was a lot of paperwork. She said it seems like they make it really hard, so we didn’t bother. It put us off using the fund. A grant or incentive payment would be much easier and encourage people to take on more students.” Architectural firm, North West England

Learning Curves: Shaping small business growth through skills, education and training

RECOMMENDATIONS: The Department for Education should:

• Develop a dedicated small business engagement offer, with a simplified school partnership model through the new careers advice support service.

– It should also develop a simplified, low-burden framework for small businesses to offer structured work experience, with clear liability guidance, a standardised DBS checking pathway, and a lighttouch matching service.

• Introduce a one-off “First Placement Payment” to employers hosting their first work experience placement under the Work Experience Guarantee.

– This should be worth £50-150 per pupil per week of work experience, to help incentivise more businesses to host work experience that are deterred by perceived costs and administrative frictions.

• Make financial and enterprise literacy a statutory and assessed component of PSHE at Key Stage 4. • Incorporate spoken communication as an assessed component in at least two GCSE subjects. • Embed a statutory digital literacy standard within the national curriculum at Key Stage 3 and 4, covering effective web search, use of safe and critical use of AI tools, and prompt refinement.

– This standard should be reflected in a mandatory module within all apprenticeship standards across all sectors and occupations, ensuring that work-ready digital capability is a baseline expectation rather than a sectoral add-on or available only to certain roles.

• Make permanent the £1,000 Employer Support Fund for small businesses taking on T Level industry placements and make it available as an automatic grant.

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Learning Curves: Shaping small business growth through skills, education and training

Methodology To support this report in understanding the views and experiences of businesses on skills, recruitment, education and training, FSB undertook a mixed method approach for the research. This consisted of a survey of small businesses, along with focus groups and one-to-one interviews. FSB members (and other small business owners) were asked to participate in the research through email invitations and social media outreach. The focus groups took place in November 2025, and the participants were sourced through recontact data from the survey.

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The survey was administered by the research agency Verve and was in the field from 15 July to 4 August 2025. The survey received 527 responses, and the findings were weighted by region to make them representative of the UK business population. All percentages have been rounded to the nearest percentage point, which is why some of them may not add up to 100 per cent.

Learning Curves: Shaping small business growth through skills, education and training

Endnotes 1

esolution Foundation, Mountain climbing: R Making progress on the UK’s growth policy challenge, January 2026

entre for Economic Performance, UK C Economic Performance Since 1997: Growth, Productivity and Jobs, December 2011

ffice for National Statistics, Earnings and O employment from Pay As You Earn Real Time Information, seasonally adjusted,July 2026; House of Commons Library, UK labour market statistics, July 2026; People Management, Employers face biggest redundancy surge in a decade as hiring confidence plummets, CIPD research finds, February 2026

epartment for Education, Skills and UK D productivity: estimating the contribution of educational attainment to productivity growth, February 2023; Learning and Work Institute, No train, no gain, March 2026

I nternational Monetary Fund, Upskilling the UK Workforce, July 2024

ffice for Budget Responsibility, Fiscal risks O and sustainability, July 2026

ouse of Lords Economic Affairs Committee, H Preparing for an ageing society, December 2025

anchester Institute of Innovation Research, M The Effects of Policies for Training and Skills on Improving Innovation Capabilities in Firms, June 2012

Chris Dillow, The cost of markets, April 2026

Institute for Fiscal Studies, Funding, finance and reform: an analysis of the Post-16 Education and Skills White Paper, November 2025; FE Week, Second LLE short course trial falls short on recruitment, February 2026,

Skills England, Driving growth and widening opportunities, September 2024

epartment for Education, Employer Skills D Survey, August 2025

I nstitute for Fiscal Studies, Funding, finance and reform: an analysis of the Post-16 Education and Skills White Paper, November 2025

epartment for Education, The National D Strategies 1997–2011: A brief summary of the impact and effectiveness of the National Strategies, March 2011

atsby Charitable Foundation, Good Career G Guidance: The Next Ten Years, November 2024

arvard Business School, Unwilling to Reskill? H Experimental Evidence from Real-World Jobseekers, February 2026

Ibid

ECD, OECD Economic Surveys: United O Kingdom 2024, September 2024

epartment for Education, Employer Skills D Survey, August 2025

esley, Coelho and Van Reenen, Investing for B prosperity: skills, infrastructure and innovation, May 2013

ederation of Small Businesses, Small Business F Index, Quarter 4, 2025, January 2026

he Guardian, IMF upgrades UK growth T forecast as fears over impact of Iran war diminish, July 2026

ttps://www.gov.uk/government/publications/ h autumn-budget-2024; HM Treasury, Autumn Budget 2024

ederation of Small Businesses, Growth hopes F at lowest ever level among small firms, new research finds, July 2026

ffice for National Statistics, Earnings and O employment from Pay As You Earn Real Time Information, seasonally adjusted, July 2026

lundell, Dearden, Meghir and Sianesi, Human B Capital Investment: The Returns from Education and Training to the Individual, the Firm and the Economy, 1999; Dearden, Reed and Van Reenen, The impact of training on productivity and wages: evidence from British panel data, 2005 ianchi and Giorcelli, The Dynamics and B Spillovers of Management Interventions: Evidence from the Training Within Industry Program, May 2021

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Learning Curves: Shaping small business growth through skills, education and training

ouse of Commons Library, February 2026 H Economic update: mixed picture before the 2026 spring forecast, February 2026; Department for Work and Pensions, Almost a million young people to benefit from expanded support, new training, and work experience opportunities, December 2025

ffice for National Statistics, Vacancies and O jobs in the UK: March 2026, March 2026

ffice for National Statistics, Construction O output in Great Britain: December 2025, new orders and construction output price indices, October to December 2025, February 2026

entre for British Progress, Post Haste: why C can’t young Brits find work?, March 2026

epartment for Science, Innovation and D Technology, A snapshot of entry-level hiring in the UK, June 2026

I nternational Labour Organization, The power of small: unlocking the potential of SMEs, October 2019

ffice for National Statistics, Vacancies and O jobs in the UK: March 2026, March 2026

esolution Foundation, Take a chance on me: R How can employers be incentivised to employ NEETs?, June 2026

hartered Institute of Personnel and C Development, Changing face of the youth labour market, December 2024

single parents; someone from an ethnic minority background; former members of HM Armed Forces; those returning to work after they had retired; unpaid carer; an individual is disabled under the Equality Act 2010; and refugee / asylum seeker. Don’t know and other removed 42

kills England, Driving growth and widening S opportunities, September 2024; Department for Education, Employer Skills Survey, August 2025

I nternational Monetary Fund, Upskilling the UK Workforce, July 2024

igration Observatory, Migrants in the UK M labour market: an overview, May 2026

dge Foundation, Skills shortages in the UK E economy, October 2025

epartment for Business, Innovation and Skills, D Research to understand the extent, nature and impact of skills mismatches in the economy, May 2016; Roland Rathelot, Thijs van Rens and See-Yu Chan, Rethinking the skills gap, November 2023; Barclays Corporate, Skills shortage in UK manufacturing, 2024

epartment for Education, Employer Skills D Survey, August 2025

earning and Work Institute, Training and skills L needs: trends and challenges in UK growth sectors, March 2026

ederation of Small Businesses, Scaling Up F Skills, 2022

rowley, Overqualification and skills mismatch: C a growing challenge for the UK labour market?, March 2025

igration Observatory, Migrants in the UK M labour market: an overview, May 2026; Work Rights Centre, Why the Fair Work Agency needs a migrant worker focus, February 2025

esolution Foundation, Mountain climbing: R Making progress on the UK’s growth policy challenge, January 2026

atrick Schneider, The UK’s productivity P puzzle is in the top tail of the distribution, Bank Underground, March 2018; Syverson, What Determines Productivity?, June 2011

I MD World Competitiveness Center, World Competitiveness Ranking 2026, June 2026

epartment for Business, Innovation and D Skills, Evaluation of the Apprenticeship Grant for Employers (AGE 16 to 24) programme, December 2013

onstruction Industry Training Board, C Construction Workforce Outlook: Labour Market Intelligence Report 2026 to 2030, June 2026

rades Recognition Australia, Skills T assessment, accessed July 2026

efugee Employment Network, Statements of R comparability (UK ENIC), accessed June 2026

hartered Institute of Building, Equality, C diversity and inclusion policy position, accessed July 2026

e define the group ‘Employers of W Underrepresented Workers’ as small employers employing someone furthest from the labour market, which includes: Individuals whose highest educational achievement is lower than Level 4 or Grade C GCSE Maths / English; someone who has been on Universal Credit in the last three years; long term unemployed;

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Learning Curves: Shaping small business growth through skills, education and training

onstruction Industry Training Board, UK C Construction Industry Picture 2026, 2026

onstruction Industry Training Board, C Construction Workforce Outlook: Labour Market Intelligence Report 2026 to 2030, June 2026

epartment for Science, Innovation and D Technology, Launch of Women in Tech taskforce, December 2025

or the purposes of this research, we F have characterised ‘soft skills’ to include communication skills, problem solving and decision making, confidence, creativity, planning and organisation, teamwork, and leadership and management.

epartment for Science, Innovation and D Technology and AI Security Institute, Assessment of AI capabilities and the impact on the UK labour market, January 2026

K workers are in occupations containing tasks U that AI could potentially perform or enhance, according to IMF estimates — a higher share than the US and other advanced economies at around 60%, reflecting the UK’s service-sectorintensive economy.

ugmentation whilst not replacing jobs A does impact job creation, as tasks are folded into existing roles or equipment rather than necessitating new jobs to complete them

atsby Charitable Foundation, Closing the G retrofit skills gap, August 2025

Ibid

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riffith and Simpson, Characteristics of G Foreign-Owned Firms in British Manufacturing, in ‘Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 19802000’,147-186pp The National Bureau of Economic Research, 2004

epartment for Work and Pensions, Strategic D Authorities S31 adult skills fund funding for 2026 to 2027, April 2026

loom, Sadun, Van Reenen, Management as B Technology?, 2017

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azear, Balanced Skills and Entrepreneurship, L 2004; Heckman and Kautz, Hard evidence on soft skills, 2012

ECD, Leveraging Business Development O Services for SME Productivity Growth, 2018

eckman and Kautz, Hard evidence on soft H skills, 2012

epartment for Energy Security & Net Zero, D Clean Energy Superpower Mission areas of research interest, October 2025

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ayhew and Keep, The assessment: M knowledge, skills, and competitiveness, 1999; Institute for Fiscal Studies, Investment in training and skills: Green Budget 2023 – Chapter 9, October 2023

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100 Skillnet Ireland, Skillnet Ireland to invest €80m in workforce development for businesses in 2026, 2026 101 Education Committee, Further Education and Skills, September 2025 102 Department for Work and Pensions, Government invests in young people with more opportunities close to home, July 2026

range from Level 2 to Level 7, mapping to educational qualifications from GCSEs to Master’s degrees. Levels are categorised as: Intermediate (Level 2, equivalent of 5 GCSE passes (grades 9-4 or A*-C); Advanced (Level 3, equivalent to 2 A-Level passes NVQ Level 3, or a BTEC National); Higher (Levels 4-5, equivalent to a Foundation Degree, HNC, or HND, and sometimes the first year of a university degree); Degree (Levels 6t-7, equivalent to a Bachelor’s or Master’s degree) 105 Federation of Small Businesses, Scaling Up Skills, 2022; Skills England, Apprenticeships finder, accessed June 2026 106 Department for Education and Department for Work and Pensions, Apprenticeships, 2025/26, July 2026 107 Chartered Institute of Personnel and Development, Apprenticeship starts in England SMEs plummet since introduction of Apprenticeship Levy, CIPD report shows, October 2023 108 Business and Trade Committee, Small business strategy, February 2026 109 Department for Work and Pensions, Apprenticeship unit funding rules: April 2026 to 31 July 2026, July 2026 110 Edge Foundation, Agents of Change, September 2025 111 Department for Education, SME apprenticeship brokerage pathfinder: early evaluation, September 2024 112 Department for Work and Pensions, Government vows to “unlock opportunities for young people across the country” ahead of National Apprenticeship Week, February 2026 113 Workplus main page, accessed June 2026; European Commission – Employment, Social Affairs and Inclusion, EAfA Member Spotlight: Workplus connects employers with talent through apprenticeships, April 2026; Edge Foundation, Chaos to Coordination: Towards a ‘one-stop’ apprenticeship platform, September 2025 114 Department for Work and Pensions, Letter from the Minister for Skills on the apprenticeship funding band reviews, June 2026

103 The Times, Parents on benefits could be paid to let teenagers be apprentices, May 2026 104 Apprenticeship levels in England range from fsb.org.uk

Learning Curves: Shaping small business growth through skills, education and training

115 Department for Education, The Net Present Value of further education in England: Analytical report, February 2025 116 Federation of Small Businesses, Fit for the Future: Making the Apprenticeship System Work for Small Businesses, April 2019 117 Department for Work and Pensions, Interim Report: Young people and work report - survey with education professionals, April 2026; Department for Work and Pensions, Young people and work: interim report, July 2026 118 Department for Work and Pensions, Young people and work: interim report, July 2026

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