UK SMEs face growth vs pay dilemma as employment costs rise and wages fall

Employment Hero, the AI-powered employment platform, has revealed new platform data from May suggesting UK SME businesses are being forced into a difficult trade-off: hire more people and grow, or protect pay for the employees they already have.

It follows an Employment Hero commissioned study with YouGov amongst SME decision makers, which found the estimated cost of employing a full-time worker is now 9.6% higher than it was 12 months ago. The latest salary figures show the repercussions of that pressure beginning to surface in salaries.

Growth vs pay dilemma
Employment Hero’s platform data shows that full-time wage growth declined -0.7% month-on-month in May and is down -1.5% compared to three months ago. The median full-time salary across UK SMEs is now £43,129, the lowest level recorded since November 2025.

It is millennials who appear to be absorbing the sharpest impact. Full-time Gen Y workers saw pay fall -1.9% over the three months to May, compared with a -1.5% decline for the full-time workforce overall. May also marks the second consecutive month where millennial wage growth has been the lowest of all age cohorts and the third consecutive month of negative growth for the generation on the quarterly measure, a pattern that moves this well beyond a one-month anomaly.

For a generation already facing high housing, mortgage, childcare and living costs, that pay squeeze lands at a particularly difficult moment.

The rising cost of employment
While wages declined, full-time employment continued to grow. Headcount across UK SMEs rose 1.2% month-on-month and is 0.6% higher than three months ago.

This suggests that while employment within SMEs is growing, wages are moving in the wrong direction.

For employers, this points to a growing commercial squeeze. When the cost of every hire rises, businesses still growing may have less room to increase salaries. They could face a choice between expanding their workforce and holding back on pay rises, or rewarding existing employees but slowing down on hiring.

SMEs need stability from Government
Employment Hero’s data has consistently highlighted the impact of political turbulence on SMEs. As the UK enters another period of political transition, the latest figures suggest that employment is recovering but remains weaker than it was before Labour’s first Budget in 2024.

Whilst year-on-year employment growth among SMEs averaged 5.8% across the six months to May 2026, it remains well below the 8.2% six-month average recorded before the October 2024 Budget, indicating a weaker labour market.

Since that Budget, Employment Hero data shows that SME employment growth has followed a distinct u-shaped curve, with steady recovery since early 2025. The worry is that any progress risks being undermined by renewed political uncertainty.

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Kevin Fitzgerald, UK Managing Director at Employment Hero, commented: “Changes in Government inevitably create uncertainty for small businesses, many of which are only just beginning to recover from a prolonged period of economic turbulence. Right now, what SMEs need is clarity, stability and confidence in the road ahead.

“Over the past two years, businesses have navigated rising costs, increased regulatory complexity and ongoing economic pressure, all while continuing to invest and grow. Our latest data shows that employment growth rose 1.2% month-on-month in May, which tells us that SMEs are still hiring despite all of the challenges. That’s pretty remarkable.

“But whilst businesses are hiring, the cost of employment is soaring and this is having a knock-on effect on wages with full-time pay at its lowest point since November 2025.

“The risk is that renewed political uncertainty slows the momentum we’ve started to see in the labour market. We’ve already witnessed the seismic impact that policy change can have on the UK jobs market, so whoever takes responsibility for steering the UK economy from here must provide our country’s small businesses with a solid foundation so that they can continue creating the opportunities that drive the country forward.”