Increases in the national minimum wage and holiday entitlement could limit the number of employees small businesses are able to employ.
According to research carried out by the Small Business Research Trust and the University of Liverpool Management School, and sponsored by HSBC Bank, for the final quarter of 2006, more than a quarter of the organisations surveyed said that these factors had presented them from employing an average of one or two extra staff.
Mark Berrisford-Smith, chief economist for HSBC, said: "Smaller firms enjoyed a modest expansion in their turnover in the final quarter of 2006. But with interest rates already on the way up it is no surprise that this was not translated into higher employment."
In terms of industry sectors, employment levels were down in manufacturing, with 21% of firms having to cut back on staff, while just 15% had increased staff numbers. In wholesale and retail, employment figures were also poor. In the hotel and restaurant sector, meanwhile, 33% were downsizing their workforce and just 19% recruiting.
Brian Wolfe, chairman of the Small Business Research Trust, said: "Smaller businesses need, and deserve, better support rather than the approach of the present government."