Wage growth at small and medium-sized businesses across Britain fell in January, in a further sign of the weakening jobs market.
Analysis by Employment Hero shows SME wage growth fell by 1 per cent month-on-month in January, the first fall in a year.
It follows Tuesday’s bleak update from the Office for National Statistics (ONS) that showed the unemployment rate reached a five-year high of 5.2 per cent at the end of last year.
That fed through to wage growth, which slowed to 4.2 per cent year-on-year in the three months to December 2025, down from 4.5 per cent in November.
Employment has been hit hard by the decision to raise employer National Insurance contributions in the 2024 Budget, along with increases to the minimum wage.
And small firms are among those that are worst-affected, as they are unable to absorb the costs as well as bigger firms.
Hard hit: Wage growth among SMEs in the north of England was hit hardest last month, down 4.9% month-on-month
Employment Hero said the data showed SMEs were opting to ‘exercise caution’ amid pressure from high costs and taxes, as well as cautious consumers battling with the cost of living.
Kevin Fitzgerald, UK Managing Director at Employment Hero said: ‘January’s wage dip is an early warning sign.
‘Small businesses are heading into 2026 facing higher wage bills and significant regulatory change in April and many are already tightening the purse strings.’
The analysis, based on real-time data from over 115,000 employee records within SMEs, claimed many small firms were struggling to ‘balance a growing number of competing financial demands’.
Wage growth among SMEs in the north of England was hit hardest last month, down 4.9 per cent month-on-month.
Despite the decline, the longer-term picture showed that year-on-year wage growth stood at 5.6 per cent last month, up from a -2.6 per cent year-on-year dip recorded this time a year ago.
This marked the first above inflation increase in wages since June 2025.
The data revealed a ‘modest’ month-on-month rise in SME employment growth in January, up 0.6 per cent on December 2025.
While this is positive, it did follow a period of decline amid ‘ongoing uncertainty’, Employment Hero said.
Looking at the longer-term picture, year-on-year employment growth in SMEs declined sharply after April 2025 and remained subdued throughout the summer. Since October, however, there has been some recovery.
Fitzgerald said: ‘While year-on-year employment growth is improving, the recovery is fragile.
‘If costs continue to rise faster than confidence, pay growth and hiring could be the first casualties.
‘Policymakers need to be careful not to overload the very businesses driving the UK’s employment recovery’.
Employment: A chart showing employment at SMEs slowed in 2025, but has started to pick up again
As many businesses of all sizes look to cut costs, unemployment across Britain is rising.
Many businesses have slowed hiring, pointing to measures in Rachel Reeves’s last two Budgets, including a hike in employer national insurance contributions and an increase in the minimum wage, as upping their costs.
And young people are bearing the brunt, with unemployment for those aged between 16 and 24 climbing to 16.1 per cent, its highest in more than a decade.
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