As we navigate through 2025, small and medium-sized enterprises (SMEs) across the UK are facing increasing pressure when it comes to managing and supporting their workforce. From rising employment costs to evolving legislation, employers are having to rethink how they recruit, retain, and support their teams.
In this blog, we explore the most pressing workforce challenges currently facing UK SMEs—and what proactive steps employers can take to stay ahead.
1. Rising Employment Costs
A key concern for many SMEs this year is the mounting cost of employing staff. This includes:
- An increase in Employer National Insurance Contributions from 13.8% to 15%.
- A 6% rise in the National Minimum Wage, impacting wage bills across the board.
For businesses already working with tight margins, these increases are significant. Many are now reviewing headcounts, adjusting pay strategies, or passing costs onto customers. Strategic workforce planning is essential to ensure long-term sustainability.
2. Attracting and Retaining Talent
The post-pandemic labour market continues to be fiercely competitive, and SMEs often find themselves at a disadvantage compared to larger employers. Key recruitment and retention concerns include:
- Limited capacity to offer competitive salaries and perks.
- Ongoing skills shortages in key sectors.
- Shifting employee expectations, with a strong emphasis on flexible working, wellbeing, and career development.
In response, many SMEs are investing in upskilling existing staff and improving their employer branding to attract talent that aligns with their values.
3. Mental Health and Employee Wellbeing
Employee health and wellbeing has taken centre stage, particularly as sickness absence rates hit a 15-year high in the UK. In 2023, over 104.9 million working days were lost due to long-term health conditions.
This has prompted a growing number of SMEs (over 75%, according to recent surveys) to revamp their employee benefits, with a focus on:
- Mental health and counselling services
- Private medical insurance
- Flexible and hybrid working policies
- Enhanced sick pay and leave options
Employers who prioritise wellbeing not only support their staff more effectively but also benefit from improved engagement and reduced attrition.
4. Legislative Changes: The Employment Rights Bill
The upcoming Employment Rights Bill—expected to pass in mid-2025—has sparked concern among SMEs, particularly around compliance and legal risks. Key proposals include:
- Day-one rights for unfair dismissal claims
- Stricter rules on zero-hours contracts
- Statutory Sick Pay from day one, with no earnings threshold
- Flexible working as the default
While the Bill is intended to protect employees and modernise working life, many SMEs are unsure how to implement the changes without increasing legal exposure or operational disruption. Professional HR advice is critical during this transition.
5. Business Confidence and Economic Pressure
Finally, economic uncertainty remains a key factor. With SMEs projecting an average revenue loss of £138,000 in 2025, many are making cautious choices around investment, staffing, and growth.
Add to that political shifts, inflation, and a changing tax landscape, and it’s clear why confidence among SME leaders has fallen to record lows.
What Can Employers Do?
At PSHR, we recommend the following steps to help mitigate these challenges:
- Audit your current contracts, policies, and benefits to ensure compliance and competitiveness.
- Engage with employees to understand what matters most to them—and act on it.
- Invest in training and upskilling to future-proof your team.
- Stay ahead of legislative changes, especially around flexible working and statutory rights.
Need Support?
Whether you’re reviewing policies, updating contracts, or preparing for the Employment Rights Bill, PSHR is here to help. Our CIPD-qualified consultants work with SMEs to deliver practical, commercially sound HR solutions.
Get in touch today to find out how we can support your business.
📧 hello@pshumanresources.co.uk
📞 01473 653000
🌐 pshumanresources.co.uk
