UK Hiring Slows at Small Businesses Weeks Before the Budget

UK employment growth at small businesses has cooled weeks before Chancellor John Healey delivers his Budget, according to Employment Hero’s latest Employment Index.

Drawing on payroll data for 169,661 employees at 4,842 businesses, analysis of the figures show that employment growth fell from 4.9% in March to 2.9% over the three months to September this year. 

Employment is still growing, but more slowly: average staff numbers per business in the Index rose 1.4% month-on-month (MoM) in September. Even so, employers watching their costs ahead of the Budget are still adding to their teams. 

Recruiters report rising demand for staff too. According to Bloomberg, the monthly KPMG and REC Report on Jobs showed its index of private sector vacancies rising above 50, the level that separates growth from decline, in September for the first time in more than two years, while permanent placements rose for a second month.

UK Jobs Market: Employment Grew in Every Region in September

The Employment Index’s regional breakdown of employment growth reveals how that growth is showing up across the UK, with all areas in the dataset showing some form of growth MoM and Quarter-on-Quarter (QoQ). 

The South of England outside London led the quarter at 4.2%, ahead of Wales at 3.4%, London at 3.3% and the North at 3.2%, while the East trailed at 0.8%. The Midlands recorded the strongest month, at 2.6%, followed by the South at 2.5% and Wales at 2.3%. London grew just 0.2% in September.

Not every sector grew, however. Over the quarter, staff numbers fell 8.64% in education and training, 1.25% in administration and office support, 1.16% in banking, finance and insurance and 0.16% in sales, marketing and media. In September alone, staff numbers fell 6.21% in education and training and 0.21% in banking, finance and insurance.

Those who are most visibly gaining from employment growth appear to be young people. Gen Z employment rose 1.9% in September and 4.8% over the quarter, the highest of any generation in the Index, and in science and technology it rose 4.7% compared to August. Gen Z median pay is also up 9.4% on the year.

How UK Wage Growth Compares With Official Figures

When it comes to wages, median pay at small to medium businesses (SMEs) in the Index was 0.6% higher in September than in June, about half the 1.1% to 1.2% rise recorded over three months in mid-to-late 2025, and closest to its lowest level in 25 months.

Month-on-month, that slowdown has continued: median pay in September was just 0.1% higher than in August, among the weakest monthly rises in recent months. Although pay is still 5.1% higher than a year ago, it’s worth noting that this figure includes earlier months, when wage growth was rising at a faster rate.

Broken down by sector, that modest pay growth was strongest in accounting, HR and legal services, with 0.9% quarterly pay growth. Construction and trade services also saw an uplift, with 0.7% QoQ wage growth and 0.5% for retail, hospitality and tourism. In sales, marketing and media, administration and office support, however, pay growth was flat (0.0%).

MoM, that picture looks similarly subdued. Accounting, HR and legal services rose 0.1% in September and construction and trade services 0.12%, while retail, hospitality and tourism managed 0.09%. Four sectors saw no growth at all: sales, marketing and media, education and training, real estate and property, and agriculture, mining and energy.

At 0.20%, science and technology saw the strongest MoM pay growth, with banking, finance and insurance close behind at 0.17%. That fits with where employer demand and government money are heading. Employers are changing what they hire for: 64% of UK employers say AI has changed what they look for in candidates, with AI skills now among the top five attributes they screen for. Ministers are backing the same shift, with Healey confirming £15m to revive the Union Learning Fund, which will help workers retrain in skills including digital literacy and adapting to AI.

How other Reports Compare

While the Office for National Statistics measures pay differently, its latest figures show one trend in common with the Employment Index: pay growth is cooling. Total pay including bonuses grew 3.9% in the three months to July, down from 4.2% in the previous period and the slowest since late 2020. Regular pay, which excludes bonuses, was steadier, with annual growth of 3.5%, a rate that has held broadly steady across five consecutive three-month periods.

Pay is also growing ahead of inflation in both datasets: CPIH, the ONS’s preferred inflation measure, averaged 3.0% over May to July, below the Index’s 5.1% annual rise in median pay and the ONS’s 3.5%. The previous Employment Index found full-time salaries at small and medium-sized businesses up 5.4% in the year to August.

More recent external analysis reports similar cooling in wage growth. The KPMG and REC Report on Jobs for London, published on 8 October, found starting salaries for permanent joiners in the capital rose at the slowest pace since March, and temporary hourly pay at the slowest in four months.

Speaking in response to the publication of the data, interim chief executive of the Recruitment and Employment Confederation, Maxine Bligh, said: “The Chancellor cannot seize this moment with talk of stability alone. Employers want to hear not just how we will deliver stability, but how we will go for growth.” 

Cost Pressures Build Before the Budget

Small businesses have seen how negatively government budgets can impact their hiring before, and Employment Hero’s data has shown how long recovery can take. As Kevin Fitzgerald, UK Managing Director at Employment Hero, explains: “SMEs tend to feel economic and policy shocks faster and more sharply than larger businesses, but their size and agility also allow them to adapt and rebound more quickly.

“Employment growth among SMEs fell sharply following the 2024 Budget, before facing another blow in 2025. Since then, they have steadily recovered, but with employment growth only now returning to early-2024 levels, there is a limit to how often small businesses can be asked to absorb major changes.” 

He added: “SMEs have proven remarkably resilient over the past two years, but that resilience should not be taken for granted.”

Room for the Government to make major changes for businesses is narrowing as 28 October approaches. In September, Reuters reported that government borrowing in the first five months of the financial year was £8.1bn above the Office for Budget Responsibility’s forecast. The ITEM Club’s chief economic adviser, Matt Swannell, said higher gilt yields had halved the Chancellor’s headroom against the government’s main fiscal rules, leaving just over £10bn. The CBI has also warned that private sector activity fell in the three months to September. 

Whatever the Chancellor does with that headroom, he will do it knowing small business pay growth is close to its lowest level in 25 months.