Skills England has published its first Annual Skills Report, and the message for small firms is clear: skills gaps are likely to become a bigger operating issue, not a distant policy debate.
The report, announced on 1 June, says demand across priority sectors in England is expected to grow by around 24% over the next decade. Skills England said that could mean up to 1.8 million additional workers being needed by 2035, with pressure on apprenticeships, technical education, reskilling and local training systems.
For small businesses, the important point is not just the national number. It is the practical risk that hiring, training and retaining people with the right mix of technical, digital and work-ready skills may become harder in sectors that are already competing for staff.
What the report says
Skills England said its first annual report draws on skills needs assessments across ten priority sectors linked to economic growth. The announcement highlighted five areas for action: addressing shortages, increasing employer investment in training, responding to artificial intelligence, supporting young people’s employability, and building a more responsive local skills system.
The report also links the skills challenge to youth employment. It references the Alan Milburn interim report on young people and work, which found that nearly one million 16 to 24-year-olds are not in education, employment or training. Skills England said employers, providers, local leaders and government will need stronger partnerships if the system is to respond quickly enough.
That matters to SMEs because small employers often feel skills shortages earlier than larger organisations. A missing technician, supervisor, installer, bookkeeper, software specialist or experienced front-of-house manager can put immediate pressure on service levels, delivery times and growth plans.
Why SMEs should pay attention
Many small firms do not have a formal workforce plan. Recruitment happens when someone leaves, demand rises, or an owner finally has enough confidence to add a role. That can work in a steady labour market, but it becomes risky when several sectors are chasing the same people at once.
The report’s focus on priority sectors is especially relevant for SMEs in manufacturing, construction, clean energy, digital, creative, life sciences, engineering and business services that support larger supply chains. Even firms outside those sectors may be affected if digital skills, AI literacy and customer-service capability become baseline expectations across the economy.
BritishSME recently covered how local innovation funding may become more closely shaped by English regional priorities. The skills report points in a similar direction: small firms may need to understand not only national schemes, but also what local colleges, mayoral authorities, training providers and sector bodies are prioritising.
What small employers can do now
The first useful step is to map the roles that would constrain the business if they became harder to fill. Owners should look beyond current vacancies and ask which skills are essential to delivery, sales, compliance, cyber security, automation, customer service and finance administration.
The second step is to separate skills that must be hired from skills that can be trained. A small firm may not be able to compete with larger employers on salary for every specialist role, but it may be able to develop supervisors, apprentices, junior technicians or digital champions if the pathway is planned early enough.
The third step is to build links before a hiring problem becomes urgent. Local colleges, independent training providers, chambers of commerce, sector groups and combined authorities can help firms understand apprenticeship options, short courses and funded support. Those relationships are often easier to build when there is time to explain the business need properly.
Where cash flow is tight, training spend has to be judged carefully. The report notes the long-term decline in employer investment in training and says SMEs can struggle to engage with the skills system. That is a real concern: small firms need training that is relevant, practical and worth the time away from the job. Our previous coverage of late payment pressure on UK SMEs is a reminder that even sensible investment has to fit working-capital reality.
AI skills are becoming a mainstream issue
Skills England also highlights the rapid adoption of artificial intelligence. For SMEs, this should not be read as a demand to buy every new tool. A more practical starting point is to identify where staff need confidence using digital systems, handling data, spotting risks, and understanding when automation can or cannot be trusted.
That might mean training office staff to use AI-assisted admin tools safely, helping managers understand data protection and cyber risks, or giving operational teams better digital skills for scheduling, stock control, quoting, design or customer communication. The goal is not novelty; it is making sure technology improves the business without creating avoidable mistakes.
The practical takeaway
The Skills England report is not a new grant deadline or a single scheme to apply for. It is a warning that skills planning is becoming more central to business resilience, especially in growth sectors and places where local training systems are being reshaped.
Small firms should use the report as a prompt to make a simple workforce plan: identify the roles most likely to hold back growth, decide which skills can be developed internally, speak to local training partners, and keep an eye on regional priorities. Businesses that wait until the vacancy is urgent may find the market has already moved against them.
Sources
- Skills England, Landmark report sets out action to address key skills gaps, 1 June 2026
