Millions of workers in the UK are bracing for subdued salary increases as small businesses grapple with economic uncertainty and rising employment costs. A shift in government policy and a looming tax burden have led many employers to curb hiring plans and rethink wage growth strategies.
A survey by the Federation of Small Businesses (FSB) at the end of 2024 found that 33% of small employers expect to reduce their workforce, a significant jump from 17% in the previous quarter.
The number of businesses planning to hire has also dropped, adding to concerns about job security and wage stagnation in 2025.
Small Businesses Rethink Hiring and Salary Budgets
Small firms are under growing financial strain, prompting them to scale back both recruitment and salary increases. According to the FSB, only 10% of small businesses now plan to expand their workforce, down from 14% in the previous quarter. Meanwhile, 56% intend to maintain current staffing levels, reflecting cautious sentiment across the sector.
One of the main concerns for employers is the potential impact of new workplace regulations. Tina McKenzie, FSB’s Policy Chair, warned that plans allowing employees to take legal action against employers from their first day on the job could have far-reaching consequences.
While protections against discrimination remain necessary, broadening such rights could lead to an increase in legal disputes, she argued, adding further uncertainty for businesses.
At the same time, changes to Statutory Sick Pay (SSP) could make hiring more expensive, leading some firms to reconsider expansion. Two-thirds of small businesses surveyed by the FSB said these measures would make them more hesitant to take on new staff, while a third indicated they might reduce their workforce ahead of the policy changes.
Employers Adjust Pay Strategies Amid Rising Costs
Alongside employment concerns, wage growth is also facing a slowdown. Many companies had been gradually increasing salary budgets following the pandemic, but recent fiscal policies have tempered this trend.
Lindsey Clayfield, senior director for Work and Rewards at Towers Watson, noted that salary increases are now returning to pre-pandemic levels, with most budgets aligning around the 3% mark seen in 2019.
A key factor behind this shift is the rise in Employer National Insurance contributions, which has placed additional financial pressure on businesses. As a result, employers are rethinking how they distribute pay rises, focusing on retaining high-performing employees rather than broad wage increases.
To offset lower salary growth, some firms are turning to non-monetary incentives such as enhanced benefits and workplace perks. Reviewing employee reward packages could help mitigate the impact of below-inflation wage adjustments, ensuring businesses remain competitive while managing costs effectively.
