Figures by Markit showed the purchasing managers' index (PMI) stood at 55.5 in December - down from 55.9 in November, but above the average of 55.4 in the third and fourth quarters. Any figure above 50 indicates expansion in the sector.
The figure was buoyed by a "strong increase" in new business in December, Markit said.
But companies' confidence has been knocked: data tracking firms expectations for activity over the next 12 months was at its weakest since February 2013.
Chris Williamson, Markit's chief economist, pointed to factors including the introduction of the new Living Wage, which is due to be introduced at £7.20 in April, and will gradually rise to £9.
"A rosy outlook is by no means assured. With business expectations about future workloads dropping to the lowest for almost three years, firms are becoming more cautious in the face of growing uncertainties.
"The cost impact of the Living Wage, government spending cuts, a potential hike in interest rates, global economic growth jitters and of course ‘Brexit’ are all weighing on business minds and pose significant downside risks to economic growth in 2016."