Unemployment in the United Kingdom has risen to 4.5% for the first quarter of 2025, marking the highest level since the summer of 2021. This represents a 0.2 percentage point increase from the previous quarter and is based on data from the Office for National Statistics’ (ONS) Labour Force Survey (LFS). While the LFS has faced criticism due to declining response rates, recent updates by the ONS indicate ‘clear improvement’ in data quality.

The unemployment rate continued to edge up, reaching 4.6% in the three months to April 2025, as reported by both the ONS and Trading Economics. This gradual uptick is notable but remains low by historical standards—unemployment peaked at 8.5% in 2011 and was above 11% in the 1980s.

Labour market indicators; what the numbers show

Alongside the higher unemployment rate, job vacancies have also dropped. There were 761,000 vacancies in the three months to April 2025, down 5.3% on the previous quarter and 131,000 fewer than a year earlier. The construction industry experienced the most significant fall in openings.

Employment levels have seen some volatility. The number of payrolled employees dropped by 47,000 between February and March 2025, and the overall employment rate remained steady at 75%. Economic inactivity, however, increased to 21.4%, still above pre-pandemic levels.

Pay growth and policy changes

Regular pay growth slowed slightly to 5.6% in the three months to March, compared with 5.9% in the previous period. While still high by historical standards, this slower growth may reassure the Bank of England, which recently reduced interest rates to 4.25% in May 2025, the second reduction this year.

The Bank of England is closely monitoring how businesses adapt to significant changes, including a £26 billion increase in employer National Insurance contributions (NICs) from April 2025, with rates rising from 13.8% to 15% and the threshold for employer NICs lowering. Additionally, the national living wage increased by 6.7% in April 2025.

Implications for small businesses

The combination of higher unemployment, fewer job vacancies, and rising labour costs creates a challenging environment for small businesses. 

While higher unemployment may suggest a larger pool of available workers, the reduction in vacancies and ongoing economic uncertainty may make hiring decisions more complex. Additionally, increased employer costs, such as higher NICs and a steeper national living wage, can squeeze margins for owner-managed businesses.

Small businesses may find it harder to attract and retain talent as competition for skilled workers remains fierce in certain sectors. On the other hand, the broader cooling of the labour market could ease some wage pressures over time, especially if economic growth remains subdued.

Looking ahead…

Forecasts from late 2024 suggest that the UK unemployment rate will remain relatively stable in 2025, averaging around 4.1% for the year, with a possible fall to 4% in 2026.

However, the labour market is sensitive to both domestic policy changes and global economic trends, such as the recent introduction of US tariffs, which have added to economic uncertainty.

What could small businesses do?

With this backdrop, it’s more important than ever for owner-managed businesses to stay informed about labour market trends and to regularly review their staffing and payroll strategies. Understanding the impact of new tax and wage regulations, such as the increased employer NICs and higher national living wage, will help businesses plan more effectively for the year ahead.

If you’d like to discuss how these changes could affect your business, or if you’d like to chat through any aspect of the above, please get in touch.