Do rising employment costs demand more flexible partners?

UK employers are facing the most challenging labour market in over a decade. Employment costs are rising faster than productivity, new regulations are adding friction, and the risks of holding roles in-house have never been higher.

The result? A financial and operational squeeze that is forcing businesses to rethink how they build and resource their teams.

Organisations that adapt their resourcing model can protect agility, reduce cost exposure, and stay competitive.

 

Employment costs are rising faster than business can keep up with

According to the 2025 CBI/Pertemps Employment Trends Survey, UK businesses are being pushed to breaking point by rising labour costs. 73% of employers now rank labour costs as the number‑one threat to the UK’s competitiveness, more than any other factor in the economy.

A major driver is the cumulative effect of National Living Wage increases and the rise in National Insurance Contributions (NICs). Taken together, these increases now cost UK employers over £24 billion extra per year, a staggering number that many businesses simply cannot absorb.

At the same time, the Employment Rights Bill is adding further obligations, with 78% of companies warning it will hit growth, investment, and jobs.

The outcome? A labour market where employers are reluctant to hire, even when demand exists. Only one in four businesses feels confident to hire normally and more expect to shrink their workforce than expand it.

 

A labour market that’s getting harder, not easier

ONS data shows volatility across the workforce, with the number of payrolled employees falling by 96,000 between January 2025 and January 2026.

Meanwhile, the CIPD Labour Market Outlook reports that employer hiring intentions are at their lowest level outside the pandemic era, and that rising employment costs continue to drag heavily on business confidence. 

Add recruitment freezes across government departments and declining civil‑service hiring, and the picture becomes clear: employers face a shrinking talent pool, rising wage bills, and increasing regulation and all at the same time.

 

The hidden risks of keeping roles in‑house

Beyond rising costs, new risks are emerging for employers who try to maintain large in‑house teams:

1. Expensive Long‑Term Commitments

Permanent hires bring ongoing costs including salaries, NICs, pensions, benefits, training at a time when business conditions are more unpredictable than ever.

2. Reduced Agility

With hiring confidence low and job mobility down, many organisations are becoming structurally inflexible. When conditions change, they cannot scale up or down quickly enough. They cannot easily grab opportunities when they arise and cannot easily scale down when projects finish.

3. Compliance and Regulatory Exposure

New employment regulations increase administrative burden, legal risk, and the cost of getting HR decisions wrong. According to Pertemps, 53% of employers now cite employment regulations as a top threat.

4. Skills gaps that get harder to fill

The CBI/Pertemps survey found that high labour costs themselves are worsening skills shortages, as businesses cut the very roles that would develop or enable new capability.

Government response can be thought of as clumsy with a financial incentive to hire people which does nothing to address the employment risks brought in through the addition of new protections and employment law.

 

Options

 

Practical Application

This can be applied in several ways:

• Reducing fixed cost exposure, replacing it with variable, on demand resourcing.
  • Providing specialists quickly, avoiding lengthy and costly recruitment cycles.
  • Giving businesses agility, enabling rapid scaling up or down.

 

Recommended Approach

Businesses increasingly recognise that solving these challenges requires a more flexible approach to sourcing capability. The alternative, continuing to carry large, in‑house, fixed‑cost teams is becoming financially untenable.

Finding a true partner with a flexible, on demand resourcing model, that blends consulting quality with contractor costs, is a strong option – especially for handling spikes in demand, for example to deliver a transition or transformation project or programme.

Flexible partners can help by:

• Reducing fixed cost exposure, replacing it with variable, on‑demand resourcing.
• Providing specialists quickly, avoiding lengthy and costly recruitment cycles.
• Lowering regulatory and compliance burden, as obligations sit with the partner.
• Giving businesses agility, enabling rapid scaling up or down.
• Increasing resilience, as capability is distributed rather than concentrated internally.

 

Data and Measurement

According to the 2025 CBI/Pertemps Employment Trends Survey, UK businesses are being pushed to breaking point by rising labour costs.

ONS data shows volatility across the workforce, with the number of payrolled employees falling by 96,000 between January 2025 and January 2026.

The CIPD Labour Market Outlook reports that employer hiring intentions are at their lowest level outside the pandemic era.

According to Pertemps, 53% of employers now cite employment regulations as a top threat.

 

Future Considerations

In a labour market defined by rising costs, tighter regulation, and lower hiring confidence, flexible models offer a path to remain competitive without carrying all the risk.

 

The Bottom Line

The UK’s employment landscape has fundamentally changed. Rising costs, new regulations, and hiring uncertainty are squeezing employers harder than at any point in recent memory. Companies that adapt by reducing fixed costs, increasing flexibility, and partnering for capability will be the ones that thrive.

Those who continue relying solely on in‑house models will carry increasing cost, risk, and rigidity in an economy where none of those things are sustainable.

 

Greg Wood
CEO, Illuminet
Greg Wood | LinkedIn