Rising employment costs are forcing SMEs to rethink hiring
Alan Milburn’s greatly anticipated review of the youth unemployment crisis recently warned that the number of people NEET (not in education, employment or training) could reach 1.25 million by the early 2030s. Among the factors identified was the rising cost of employment – something small businesses across the UK are already feeling acutely.
Employment Hero recently commissioned new YouGov research to understand exactly how businesses are responding to the wave of new employment law changes introduced over the last year.
We spoke to more than 1,000 small businesses across the UK and found that employing someone full-time now costs 9.6% more than it did last year. That’s a huge jump when you consider that, according to ONS data, average private sector wage growth sits at around 3-4% year-on-year.
While much of the conversation has, quite rightly, focused on the impact on workers, we also need to acknowledge the mounting pressure employers are under. For SMEs particularly, the combination of rising employment costs, regulatory complexity and economic uncertainty is creating a level of pressure many are struggling to absorb.
Not only does this impact hiring intent, but it also impacts employees. When employment costs are rising that sharply, the breathing room for meaningful pay rises disappears, quietly compounding the cost-of-living pressures that staff are already feeling.
What’s causing the anxiety?
It’s been a turbulent time for business. In October 2024, the Chancellor announced increased National Insurance Contributions, which caused widespread concern and an immediate slowdown in hiring. Just as businesses tried to get their heads around how they were going to absorb these extra costs, the Employment Rights Bill was passed and, with it, a raft of employment law changes to enact or face the consequences.
Now, this is not to say that the reforms announced were a bad thing. Most business owners I speak to acknowledge that the reforms are morally right and agree that their employees should have access to the protections they offer.
But this shake-up, alongside higher business costs, relentless inflation and wage pressures, has created a cacophony of pressures that directly hurts growth.
We saw this panic show up in SME hiring trends. In March 2026, directly before the new employment laws were due to come into force, we published data which found that jobs in the HR sector were up 9.9% year-on-year. Small businesses across the nation were gearing up for what they knew was going to be a bumpy ride and sadly, they were right.
Employment law complexity is rising
Our research found that 78% of the businesses surveyed said the complexity surrounding new employment laws has affected their ability to grow over the last 12 months.
Official figures also tell us that the unemployment rate in the UK has risen to 4.9%. This is perhaps unsurprising when you take into account the challenges that small businesses – the backbone of our economy – are facing.
It’s important to note that the majority of small businesses across the UK don’t have access to HR teams or legal counsel. They are small teams trying to navigate all these changes by themselves.
Our data also found that 56% of firms now believe that employing people has become more complex over the last 12 months. To dig into this further, we created a ‘complexity score’, asking respondents to rate complexity out of 10. Three years ago, the average score was 4.7. Today, it sits at 6.2. That’s a 32% increase in perceived complexity.
The majority of small businesses aren’t equipped to deal with this level of uncertainty.
I spoke to Elissa Thursfield, a specialist employment lawyer and HR expert, who told me these are concerns she hears from business owners every day. Alarmingly, they are tipping into fear, with some owners questioning whether it’s sustainable to keep operating.
When I asked what they were most concerned about, she pointed to the new day-one obligations on paternity leave and statutory sick pay, the reduction in the unfair dismissal qualifying period and the complex rules around zero-hours contracts and fire-and-rehire – big changes businesses are dealing with, all while trying to keep their doors open.
This reflects what we’re hearing internally. Our HR advisory service, which supports small businesses without in-house legal teams, has been inundated with questions about the reforms.
The impact on hiring
When small businesses are under pressure, the first thing they do is scale back on growth. This is bad for business, bad for workers and bad for the economy.
If you’re one of the 53% of small business owners worried about getting this wrong, that worry is well-founded. But it’s also solvable.
The best thing you can do is make sure you have systems in place that automatically flag issues before they become problems and, for the more complex situations, access to someone who can give you a straight answer quickly.
It may be tempting to down tools and pause on growth. But the businesses that come through this will be the ones that kept moving with the right support behind them.
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