UK SMEs Face a Hiring Dilemma as Employment Costs Outpace Wage Growth
- 4 Min Read
UK SMEs are continuing to expand their workforce despite rising employment costs, but new data from Employment Hero suggests the financial pressure is beginning to affect salaries. With full-time wage growth falling to its lowest level since November 2025 and employment continuing to rise, businesses are increasingly balancing workforce growth against the ability to reward existing employees amid ongoing economic and regulatory uncertainty.
- Author: HRD Connect
- Date published: Jun 29, 2026
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UK small and medium-sized businesses continue to recruit despite rising employment costs, but new data suggests that growth is increasingly coming at the expense of wage progression.
Analysis from Employment Hero shows that while SME employment continued to rise in May, full-time wage growth fell to its lowest level since November 2025. The findings point to a growing tension facing employers as they seek to balance business expansion with rising payroll costs and an increasingly complex regulatory environment.
The latest figures suggest that many SMEs are being forced to make difficult decisions between investing in workforce growth and maintaining competitive pay for existing employees.
Employment is recovering as wage growth weakens
Employment Hero’s platform data, covering 140,829 employees across 4,599 UK SMEs, shows that full-time employment increased by 1.2% month-on-month in May and is 0.6% higher than three months ago.
In contrast, full-time wages declined by 0.7% during the month and are down 1.5% over the past three months. The median full-time salary now stands at £43,129, the lowest level recorded since November 2025.
The figures suggest that while employers remain committed to recruitment, rising employment costs are constraining their ability to increase salaries.
The findings follow separate YouGov research, commissioned by Employment Hero, which found that the estimated cost of employing a full-time worker has increased by 9.6% over the past 12 months.
Taken together, the data points to mounting cost pressures that are reshaping employment decisions across the UK’s SME sector.
Millennials are experiencing the sharpest pay decline
The latest figures show that the impact is being felt most acutely by millennials.
Full-time Generation Y employees experienced a 1.9% decline in wages over the three months to May, compared with a 1.5% decline across the wider full-time workforce. It also marks the second consecutive month in which millennials recorded the weakest wage growth of any age cohort and the third consecutive month of negative quarterly growth.
For a generation already facing elevated housing costs, mortgage repayments, childcare expenses and broader cost-of-living pressures, continued wage stagnation is likely to place additional pressure on household finances.
The trend also reflects broader challenges across the UK labour market, where wage growth is increasingly being offset by higher employment costs and continued economic uncertainty.
Rising employment costs are reshaping workforce decisions
The latest data builds on a pattern identified across several recent Employment Hero studies.
Earlier research found that 44% of SME decision-makers had frozen or slowed recruitment because of the Employment Rights Act reforms, while one in four organisations reported increasing their use of contractors and freelancers to reduce the costs associated with permanent employment.
Combined with the latest salary data, the evidence suggests that many SMEs are adapting their workforce strategies rather than reducing headcount outright.
Businesses continue to recruit, but are exercising greater caution over pay growth as they absorb higher National Insurance contributions, rising employment costs and expanding regulatory obligations.
Political certainty remains essential
Although SME employment has continued to recover throughout 2025 and into 2026, Employment Hero notes that the labour market remains weaker than it was before Labour’s first Budget in October 2024.
Average year-on-year employment growth among SMEs reached 5.8% across the six months to May 2026, compared with an average of 8.2% during the six months preceding the Budget.
The figures suggest that while confidence is gradually improving, businesses remain highly sensitive to political and economic uncertainty.
Kevin Fitzgerald, UK Managing Director at Employment Hero, believes stability will be critical to sustaining the recovery.
“Changes in Government inevitably create uncertainty for small businesses, many of which are only just beginning to recover from a prolonged period of economic turbulence. Right now, what SMEs need is clarity, stability and confidence in the road ahead.”
He said the latest figures demonstrate the resilience of the SME sector.
“Our latest data shows that employment growth rose 1.2% month-on-month in May, which tells us that SMEs are still hiring despite all of the challenges.”
However, he warned that increasing employment costs are beginning to affect wage growth.
“Whilst businesses are hiring, the cost of employment is soaring and this is having a knock-on effect on wages, with full-time pay at its lowest point since November 2025.”
Growth is becoming more expensive
The latest Employment Hero data illustrates the increasingly difficult environment facing UK SMEs.
Businesses continue to create jobs despite sustained economic pressures and significant changes to employment regulation. However, the cost of doing so is rising, placing increasing pressure on salary growth and workforce investment.
As employment costs continue to increase and labour market conditions remain uncertain, organisations are likely to face increasingly difficult decisions over how they balance recruitment, reward and long-term growth.
The challenge is no longer simply attracting talent. It is sustaining workforce growth while preserving the financial flexibility needed to remain competitive in a changing employment landscape.
