2026 is set to usher in a wave of policy reforms that will bring a mix of opportunities and risks for UK SMEs.
Last year’s persistent geopolitical tensions, prolonged economic uncertainty and the long‑anticipated Autumn Budget combined to create an environment where cash‑flow resilience will be more critical than ever. For banks, 2026 represents a pivotal moment to support ambitious businesses.
As lenders, we have a key role to play in addressing this sense of malaise by encouraging investment and positioning ourselves as a consultative growth partner for SMEs. Our focus should be on supporting businesses as they navigate a confusing web of intensifying tax and cost pressures, compliance demands and industrial change.
Several headline measures are likely to bite this year. To name just a few: the National Living Wage (NLW) rises sharply in April, to £12.71 for those aged 21 and over. For labour-intensive sectors such as logistics, this will be a substantial cost increase.
Late payment reform is expected to move on from consultation. Last year, we welcomed reform in this area because persistent late payment practices undermine the financial health and growth potential of SMEs, costing the economy billions. Enhancing transparency and accountability, including the requirement for large companies to report payment practices in their Directors’ Reports, will shine a light on poor performers and empower suppliers to make informed decisions.
Changes will include statutory caps on payment terms (moving from 60 days to 45), mandatory interest on overdue invoices and tougher reporting. Whilst good news for micro suppliers, this does have the potential to squeeze cash margins for the larger SMEs.
Making Tax Digital for Income Tax goes live in April for sole traders and landlords earning over £50,000, with the implementation of new quarterly submissions increasing compliance requirements and admin overheads. Companies House identity verification also becomes mandatory, alongside software-only accounts filing, likely meaning governance costs will rise.
In a move which aims to level the playing field but has generally drawn a contentious reaction, business rates reform goes live from April, introducing five multipliers that will offer reform for enterprises with smaller floor space but mean larger premises will be paying a premium. Businesses operating warehouses, factories, distribution centres and production lines will be among those worst affected.
In the world of planning and construction, the tail end of 2025 saw Government reveal its latest raft of proposed reforms under the draft National Planning Policy Framework – including a new ‘medium-site’ category and a ‘default yes’ for building near transport hubs – which, if implemented effectively, could unlock SME developer pipelines.
We’ll also begin to see the real-life impact of the Autumn Budget measures including frozen tax thresholds, dividend tax increases and a restructured research and development tax relief.
All of these combined paints a clear picture of higher costs, shorter cash cycles and heavier compliance loads, making cash flow the number one pinch point for SMEs in 2026.
Despite being the backbone of the UK economy, without access to flexible finance, these businesses risk deferring investment, cutting headcount or even closing altogether. Equally, where policy creates growth opportunities SMEs need funding, and fast, to seize the moment.
Here’s how lenders can make a difference: first, lenders should explore innovative finance models that better match the evolving needs of SMEs. For example, pay-per-use finance - such as Paragon’s partnership with Otto Car and Zeti - enables businesses to access electric vehicles without the burden of large upfront costs, aligning repayments with actual usage and cashflow. Similarly, power purchase agreements, spearheaded by Paragon through our rooftop solar panel scheme, enable SMEs to access renewable energy, significantly reducing energy bills whilst upgrading sustainability credentials with no upfront cost, paying only for the power they use and removing the biggest barrier to entry – cost.
Secondly, lenders can support SMEs by providing funding for investment where policy creates new opportunities. The Growth Guarantee Scheme (GGS) is a valuable tool to help businesses invest in energy-efficient equipment, EVs and automation. To date, Paragon has committed around £70 million in GGS funding, supporting more than 500 SMEs to invest, scale and seize new opportunities.
Finally, it’s vital for lenders to differentiate themselves from high street banks by offering best-in-class service, more human contact and specialist expertise. By taking a consultative partnership-led approach, providing insight as well as funding, mid-tier lenders can attract SMEs who are often overlooked by larger institutions, helping them navigate the challenges and opportunities of 2026.
This year is a moment for lenders to prove relevance, by delivering pragmatic products that solve real problems. At Paragon, we see three behaviours which are imperative to earning the trust of customers: flexibility, speed and clarity. Flexibility to tailor facilities to sector-specific pressures, speed to deploy funds fast when policies are implemented and clarity to communicate options in plain English. If lenders get this right, 2026 could bring prosperity for the nation’s SMEs, and wider economy as a result.
