Rising costs, rising job losses: why UK businesses are feeling the squeeze

Behind these headline figures lies a deeper issue: mounting cost pressures on UK businesses that are increasingly translating into difficult workforce decisions.

The policy and economic backdrop

UK businesses are operating in an environment of persistently rising costs. In recent months, increases to business rates, National Insurance contributions and energy prices have added to pressures already created by higher interest rates and subdued consumer demand.

As Calum Blois, Manager, explains:

Recent increases to business rates, National Insurance contributions and energy costs are being reflected in the labour market. The Office for National Statistics (ONS) latest UK employment statistics show a further 43,000 jobs were lost in December, the fourth consecutive monthly decline in the number of people employed in the UK, while the unemployment rate remained unchanged at a four-year high of 5.1%.

While headline inflation may have eased from its peak, for many employers the cost base remains elevated, leaving little room to absorb further shocks without cutting expenditure elsewhere – often through reduced hiring or redundancies.

Why strong markets don’t tell the full story

The Chancellor, Rachel Reeves commented earlier this month that the recent FTSE100 record high was ‘a vote of confidence in Britain’s economy’, however around 75% of the FTSE100 companies’ revenues come from overseas. This means that the index’s surge reflects global trends rather than domestic economic strength, masking the reality that UK businesses are struggling under mounting cost pressures.

For small and mid-sized UK-focused businesses in particular, overseas growth offers little comfort. Their fortunes are tied closely to domestic demand and UK policy decisions, making them more exposed to cost increases and weaker consumer confidence.

The knock-on effects for workers and the economy

Workers are undoubtedly paying the price. Many UK companies are reviewing hiring decisions, pausing recruitment, and some sectors, particularly retail and hospitality, are seeing accelerated job losses. Fewer people in employment results in lower tax receipts and reduced public spending, which in turn fuels further unemployment, a vicious ‘doom loop’ that threatens further job losses.

This cycle has broader implications for public finances and economic growth. Lower employment reduces income tax and National Insurance receipts, while higher unemployment increases demand for public support – limiting the government’s fiscal flexibility just as businesses are calling for relief.

Technology, automation and the generational divide

Businesses are increasingly adopting automation and AI to reduce costs. Young graduates and school leavers continue to bear the brunt of this, entering a job market with fewer opportunities.

While productivity-enhancing technology can support long-term competitiveness, the short-term effect is a tighter entry-level job market. This risks leaving a generation struggling to gain experience, with potential long-lasting consequences for skills development and social mobility.

The case for targeted support

The latest ONS figures underline the need for a policy response that recognises the cumulative impact of cost pressures on employers.

As Calum concludes:

The ONS’s latest figures send a clear message: UK businesses need help with rising costs and these pressures are putting jobs at risk. To break this cycle, businesses need targeted support, such as relief on business rates or further employment incentives. Without action, the cost crisis will continue to be a job crisis, with long term consequences for domestic economic growth.

Targeted measures aimed at reducing fixed costs or incentivising employment could help stabilise hiring decisions and prevent further erosion of the labour market.

What this means for businesses and individuals

For businesses, the data reinforces the importance of proactive planning. Cost pressures are unlikely to ease quickly, and workforce decisions made now will shape resilience in 2026 and beyond. For individuals, particularly younger workers, the figures point to a more competitive and uncertain jobs market, increasing the value of adaptability and transferable skills.

What you should consider / do next

Review your cost structure: Assess the combined impact of business rates, employment taxes and energy costs, and identify areas where reliefs or efficiencies may be available.

Plan workforce strategy carefully: Balance short-term cost control with long-term talent needs, particularly in relation to automation and skills retention.

Engage with policy developments: Stay informed on potential government support measures, incentives or reforms that could affect hiring and investment decisions.

Seek specialist advice: Professional tax and business advisory support can help identify opportunities to mitigate rising costs and navigate an increasingly complex economic environment.

Would you like to know more?

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact.