UK Job Vacancies Hit Five-Year Low as Small Firms Halt Hiring

Vacancies keep falling, and small firms are leading the retreat

Britain's jobs market lost more ground in the latest official figures, and smaller employers are behind much of the slowdown. The Office for National Statistics counted about 702,000 vacancies in the three months to August. That is roughly 8,000 fewer than in the previous quarter and the lowest level since spring 2021. Leaving out the pandemic years, vacancies have not been this low for more than a decade.27 The statistics office said small firms keep naming rising wage bills as a reason they are not taking on staff.7

Other labour-market measures point the same way. Unemployment held at 4.9% in the three months to July. Early payroll data suggest the number of employees fell by 26,000 in August to 30.2 million, after a drop of 19,000 in July.1 The August figure, which may still be revised, is the largest monthly payroll fall since November last year.7 Liz McKeown, the ONS director of economic statistics, said the job losses have been most visible in retail and hospitality. She also said smaller businesses continue to report that higher labour costs are shaping their hiring decisions.1

Pay growth has slowed without collapsing. Regular average weekly earnings rose 3.5% in the three months to July, about 0.8% above inflation.1 Private-sector pay growth held at 2.9%, still a six-year low.7

Two readings of the same numbers

People reading these figures disagree mainly about how to describe them. Work and Pensions Secretary Pat McFadden called the labour market resilient in the face of serious global pressures, while saying more needs to be done for young people.2 Thomas Pugh, chief economist at RSM UK, saw signs that the jobs market is levelling off after a long weak spell.1

Both descriptions hold up for the economy as a whole. Neither works well for small business owners. Unemployment that stays flat while vacancies keep falling suggests employers are not cutting staff much but are hiring far less. The pain lands on jobseekers and on companies that would like to grow but have decided they cannot afford to. The ONS is pointing to employment costs as the reason, not weak demand. That makes this a policy problem as well as a cyclical one.

The cost stack facing small employers

The pressure on small firms comes from several costs rising together. Figures cited in recent business commentary show employer National Insurance has become the largest single business tax. Companies paid £123.1bn last year, 28% more than the year before.19 The CBI says 73% of businesses now see rising labour costs as the biggest threat to staying competitive.19 For a small company with thin margins, extra employment costs can decide whether a role gets filled now, next year or never.19

Energy costs are rising again as well. Renewed conflict in the Middle East has pushed up fuel and power prices. Household energy bills are forecast to rise 16% in January, and diesel is around £2 a litre.15 Business confidence had picked up over the summer as fighting in Iran eased, then fell back when the conflict flared again.11

Business owners are also personally carrying more risk. Purbeck Insurance found the average loan backed by a personal guarantee is now about £317,000. The average UK house price in the second quarter was £271,204. Because the family home is often the security for these loans, many owners are borrowing more than their house is worth.12 Purbeck links the rise to higher operating costs over the past 18 months, especially the National Insurance increase.12

Optimism is falling fastest among the smallest firms

Surveys of business sentiment agree, and their message is gloomy. Lloyds Bank's business barometer for September showed confidence at its lowest since April 2025, a 17-month low.14 Smaller businesses were hit hardest. Among firms with turnover below £5m, confidence fell 14 points to 39%, while larger companies held up better.11 The Institute of Directors' confidence index fell to -54 in September from -49 in August. Sixty-five per cent of business leaders said they were pessimistic about the UK economy, and more than 70% plan to freeze or cut investment over the next year.15

Small-business surveys show the same caution. The Association of Practising Accountants found 68% of small business owners are unlikely to make significant capital investments in the next 12 months, up from 65% a year earlier.19 The British Chambers of Commerce expects business investment to shrink by 0.2% in 2026.19

The US offers a useful contrast. The Justworks and U.S. Chamber of Commerce Small Business Index rose to 70.5 in the third quarter, from 66.5, close to its record high.2125 Even there, the hiring numbers are weaker than the headline. Only 17% of US small businesses said they had added staff in the past year, down from 28% a year earlier. The share planning to hire fell to 36% from 44%.28 On both sides of the Atlantic, small employers are more willing to say their business is healthy than to take on new workers.

Lending: shrinking credit, or a recovery in new loans?

The lending data send mixed signals, and this is where the coverage diverges most. Money.co.uk analysed UK Finance's postcode-level data and found outstanding bank loans and overdrafts to small businesses fell to £62.6bn at the end of 2025. That is down from £89.5bn in the second half of 2022, a drop of about 30% in three years, including £6.5bn in 2025 alone.13 Lending shrank in 78% of postcode sectors over the past year, which suggests the pullback is speeding up rather than levelling off.13 The total is now 14.5% below its pre-pandemic level of £73.3bn. That means the fall has wiped out more than just the boost from Covid-era schemes such as Bounce Back Loans.17 Access is also uneven. Businesses in the North East get about 2.5 times less bank lending per postcode sector than those in London.13

UK Finance's own Business Finance Review looks different. It found gross new lending to small and medium-sized businesses reached £5.35bn in the second quarter, the highest since the pandemic.10 Both can be true. Firms are paying down old pandemic-era debt faster than they take out new loans, so new lending can rise while the total owed falls. The practical point for owners is that new credit is available, but it is expensive and often backed by personal guarantees, and many firms are choosing not to borrow.

Forecasts suggest the demand for credit will weaken further. EY expects growth in corporate lending to fall by more than half, from 5.3% last year to 2.1% in 2026. It expects growth in overall bank lending to slow to 2.2% in 2027, a three-year low, as higher energy costs and weaker activity reduce demand.1015 Mike Morgan, head of Close Brothers, a major lender to small British firms, said this year has been hard for all businesses and pointed to higher borrowing costs and uncertainty about the Budget.14

Interest rates could rise rather than fall

Monetary policy is unlikely to offer much relief. The Bank of England was expected to hold Bank Rate at 3.75% at its September meeting.1 Pugh argued that the Bank has used labour-market weakness as a reason to hold rates. He said that position will be harder to defend if the jobs market stabilises and inflation climbs towards 4%, and that a rate rise as early as November now looks much more likely.27 Pantheon Macroeconomics expects increases in November and again in February.7 Bond markets are also signalling higher rates, with the 30-year gilt yield reaching 6%.15

This puts small employers in a difficult spot. Weak hiring has helped keep wage growth down. If energy costs push inflation higher anyway, borrowers may face higher interest rates without any easing of cost pressures.

What the Budget needs to address

Attention now turns to the 28 October Budget. Fears of new tax rises are already weighing on confidence.11 CBI chief executive Rain Newton-Smith has asked for "breathing space" from the build-up of costs that she says is holding back investment and hiring.11 The main rates of corporation tax, VAT, National Insurance and income tax are expected to stay the same. However, speculation about capital gains tax and property taxes is adding to uncertainty.19

The overall picture is consistent across the official data, the surveys and the lending figures. Small firms in Britain are not collapsing. They are holding back on hiring, investment and borrowing until their costs become more predictable. Each of those decisions makes sense for an individual company, but together they produce the record-low vacancy figures. If the government wants small businesses to drive growth, the Budget will need to keep employment and energy costs from rising further. A Budget that adds to those costs would probably lead firms to cut back even more.