UK SME wages contracted 1% month-on-month in January, marking the first decline since January 2025. The figures, drawn from more than 115,000 employee records across small businesses, reflect mounting cost pressure at the start of 2026.
The regional impact was uneven. Wages in the North of England fell 4.9% month-on-month, the sharpest decline recorded in the report. Employment Hero said the slowdown suggests businesses are responding cautiously ahead of further regulatory changes due in April.
Despite the monthly contraction, the annual trend has strengthened. Year-on-year wage growth rose to 5.6% in January 2026, compared with a -2.6% annual decline in January 2025. According to the report, this represents the first above-inflation wage increase since June 2025.
Hiring data shows clearer momentum. Employment growth increased 0.6% month-on-month in January, building on a recovery that began in October. On a year-on-year basis, employment growth reached 4.4%, up from 2.5% in December and the strongest level since March 2025.
Employment growth fell sharply after April 2025 — when changes to National Insurance contributions and the National Minimum Wage took effect — and remained subdued through the summer. While the latest figures indicate an upward trend, overall employment growth remains below pre-April 2025 levels.
Kevin Fitzgerald, UK Managing Director at Employment Hero, said: “January’s wage dip is an early warning sign. Small businesses are heading into 2026 facing higher wage bills and significant regulatory change in April and many are already tightening the purse strings.
“While year-on-year employment growth is improving, the recovery is fragile. If costs continue to rise faster than confidence, pay growth and hiring could be the first casualties. Policymakers need to be careful not to overload the very businesses driving the UK’s employment recovery”.
The January data presents a mixed picture of the SME labour market, with hiring strengthening while monthly wage growth turns negative ahead of further cost changes in the spring.
