When Achieving Net Zero Meets a Taxing Reality: Why the UK's SMEs could be about to become the unseen casualties of local net zero ambition.

Chris Livemore
Nov 5
4 min read

There’s a troubling disjunction at the heart of the UK’s climate agenda right now. On one hand, local authorities and businesses are being encouraged to deliver net-zero commitments. On the other, small and medium-sized enterprises (SMEs), who account for 99% of all UK businesses and employ roughly 60 % of the private-sector workforce, are facing rising tax burdens, cost pressures, and market fragility.

With the Government poised to press ahead with substantive tax rises at a time when many SMEs are already on a knife-edge, the ability of these firms to invest in decarbonisation may collapse entirely...and with it, large swathes of the UK’s net-zero delivery engine.

Thanks Rachel...

SME Fragility Meets Rising Taxes

High exit rates, weak investment capacity, and tax pressure combine into a perfect storm:

The Office for National Statistics reported that more than 345,000 firms closed in 2022, the highest annual figure since business-closure records began.
Research by Simply Business suggests over 600,000 SMEs could be at risk of collapse in a single year given typical closure rates (~10.8 %) across the sector.
Meanwhile, UKSMEs’ median investment as a share of GVA fell recently, about 1.73 % in 2024, limiting financial capacity for anything other than survival.
Crucially in a decarbonisation context, a Santander UK study found only 30 % of SMEs believe they have sufficient resources to become more environmentally sustainable; for sole traders it was worse at undrer 8 %.
Now add tax burdens: for example, small businesses are warning that a new nuclear-levy added to energy bills could raise their costs by £100–£240, or up to several thousand pounds for some.

These data show that many SMEs have little slack and even less margin for new investment. Rising taxation at this juncture threatens to squeeze not just profit margins but the very possibility of capital expenditure on green upgrades.

Achieving net zero depends on SMEs...but policy doesn’t

SMEs play a vital but under-appreciated role in the net-zero transition:

They account for a significant share of commercial/industrial energy consumption and supply-chain emissions.
Many SMEs are being asked to contribute to decarbonisation both directly (through their own operations) and indirectly (via supply-chain demands) just as they face cost- and tax-pressures.

Yet while large firms have access to finance, regulatory support, and economies of scale, SMEs lack that structural support, constrained by weak cash flows, limited investment capacity, and now rising tax burdens. In short: we’re asking the weakest link to carry more weight even as we tighten the chain.

What makes this especially bitter is that SMEs helped preserve momentum through the pandemic and energy-price shocks. They kept jobs alive when large firms withdrew, and many have recognised how reducing energy bills ties to broader resilience.

Yet now the signal from Westminster risks being: “Help us decarbonise...but we are going to hit you with significant tax rises first so you can't actually fund it." Genius.

The Government’s Dilemma

Our embattled Government is clearly under enormous pressure to raise taxes to meet fiscal objectives and risks a hugely damaging internal discord if it delivers spending cuts. But without safeguarding SMEs’ decarbonisation pathways, this may become a self-defeating exercise.

Tax rises will hit firms that:

Have thin margins and limited cash reserves;
Need capital to invest in low-carbon equipment, energy efficiency, clean processes;
Face supply-chain and regulatory demands to decarbonise ahead of larger competitors.

Increasing tax burdens at this juncture risks:

SMEs deferring or cancelling decarbonisation investments;
A widening “net-zero divide” between large, well-funded firms and smaller ones unable to act;
Loss of local jobs, local innovation, and the underpinning of community-level net-zero delivery;
Reduced competitiveness of UK SMEs internationally if higher costs and tax burdens push them out.

In short: If net zero is to succeed, the UK cannot tax its way to green growth (or any growth for that matter!) it must invest in enabling it. The current approach threatens the very base of net zero delivery.

What Needs to Change

Tax-relief or targeted incentives for SMEs investing in decarbonisation—from equipment to retrofits to process changes, so that tax policy becomes an enabler, not a hurdle.
Stabilised, predictable tax environment: SMEs need certainty, not surprise hikes, if they are to plan multi-year investments.
Direct support and financing mechanisms tailored for SMEs to access capital for green investment—especially for firms already managing squeezed margins.
Integrated policy framing: decarbonisation support must be paired with SME survival strategies, not treated separately. Growth and green must be aligned, not pitted against one another.
Recognition of SMEs’ role in net-zero delivery: policy must reflect that the vast majority of UK businesses are SMEs—they cannot be an afterthought in decarbonisation strategy.

A Final Warning

UK SMEs are the backbone of employment, regional economies, and the local delivery of national net zero ambitions. To penalise them now with higher taxes and expect them to accelerate decarbonisation efforts is not possible.

If the Government really wants to see net zero growth, then it must treat SME decarbonisation not as a nice-to-have, but as a front-line investment priority. Otherwise, we risk watching the engines of local green growth stall and net zero aspirations disappear as quickly as a SME's profit into the chancellor's coffers.

We are regularly reminded that the UK's net zero economy is growing more than three times faster than the overall economy at 10.1% between 2023 and 2024. Surely there is significant scope to see how we can further exploit that growth, help SMEs generate opportunities to save money by decarbonising as opposed to the wonderfully simple model of "tax, tax, tax".

The next budget looks like it could have disasterous consequences for the role of SMEs in contributing to national, regional and local net zero targets.