The latest report from the Office for National Statistics (ONS) confirms what many small businesses (SMEs) have been flagging for months: pay packets are rising even as hiring growth eases.

The figures, which align with Employment Hero’s latest Jobs Report, highlight a growing dilemma for SMEs as they balance higher labour costs with more cautious recruitment plans. Government figures show average weekly earnings in the UK continued to grow in the three months to November 2025, even as overall employment momentum remained moderate.

It’s a combination that points to a labour market where wage pressure is increasing even as employers tread carefully on expanding headcount.

A Labour Market With Rising Wages and Slower Hiring

The latest ONS data shows regular pay (excluding bonuses) rose 4.5% year-on-year (YoY) in the three months to November 2025, while total pay (including bonuses) grew 4.7% YoY. Real pay also increased, with regular earnings up 0.6% YoY and total earnings up 0.8% YoY after adjusting for inflation. At the same time, vacancy numbers edged up for a second consecutive period, but employment levels remained broadly flat.

Employment Hero’s data shows how that trend is being felt within SMEs. Employment rose just 0.5% month-on-month (MoM) in December, the slowest MoM increase since April. Employment grew 3.1% in December versus three months prior, confirming that the market is still expanding but at a noticeably slower pace. On a YoY basis, employment rose 2.5% in December, compared with 7.8% in December 2024.

As Kevin Fitzgerald, UK Managing Director at Employment Hero, points out, the ONS’s “flat employment rate aligns with Employment Hero’s real-time proprietary data, which shows that year-on-year employment growth is slowing among UK small businesses, falling from 7.8% in December 2024 to 2.5% in December 2025.”

Seasonal Hiring Surge Fails to Materialise

December usually brings a noticeable seasonal uplift, particularly for consumer-facing SMEs preparing for festive trading. That didn’t materialise this year. Employment Hero’s data points to a more reserved approach, with SMEs opting to retain existing staff rather than scaling up temporarily.

The ONS vacancy data from September–November, which shows a slight rise in open roles alongside Employment Hero’s data showing more measured headcount growth, suggests that while that demand didn’t necessarily collapse, employers are being much more deliberate and cautious in their approaches to hiring. 

But, there are reasons to interpret the minor shift as “positive.” As Fitzgerald points out: “Market confidence relies on sustained growth, and this is good news for jobseekers looking to land new opportunities in a competitive market.” 

Together, these shifts hint at a labour market that still has underlying demand but lacks the wider confidence needed for a meaningful rebound in hiring.

Entering 2026: Costs, Policy and Confidence

As employers head further into 2026, the challenge for SMEs is less about finding labour and more about managing higher labour costs and adapting to new policy settings. Wage bills are rising – as reflected in the ONS earnings figures – while Employment Hero’s real-time data shows employers adding staff at a slower rate than a year earlier.

The drivers behind that restraint are clear. Last year’s increases to the National Living Wage and National Minimum Wage, alongside changes to National Insurance, have elevated employment costs. At the same time, the Employment Rights Bill, which became law late in 2025, brought in the announcement of new compliance requirements that many smaller firms now have to adjust to.

“Rising costs combined with the Employment Rights Bill becoming law last month have placed significant pressure on employers”, Fitzgerald points out, adding that a number “have opted to play it safe when it comes to hiring, limiting employment growth.”

What Comes Next for SMEs

Taken together, the data paints a picture of a labour market that may not be contracting, but is clearly showing signs of cooling. Wages are improving faster than headcount, vacancies are rising slightly without triggering stronger hiring, and SMEs have started the year with a cautious approach to workforce expansion.

Against that backdrop, unlocking SME confidence will be key to turning things around. As Fitzgerald notes: “Small businesses are the backbone of the economy, and it is clear that more must be done to win back their confidence.

“Creating an environment that actively supports hiring will be crucial to unlocking the full potential of the labour market and driving better outcomes for both employers and workers.”

For now, SMEs are navigating a labour market shaped by rising wages and selective hiring decisions – a balance that will continue to define employment trends as the rest of the year unfolds.