UK Hiring Slows: Labour's £25bn Tax Gamble Risks Deeper Job Cuts

The British jobs market sits balanced on a precipice. Hiring for permanent roles contracted more slowly in February than at any point since March 2023, according to the monthly index compiled by KPMG and the Recruitment and Employment Confederation. But the index reading of 49.2, whilst improved from January's 46.9, remains firmly below the 50 threshold that separates growth from decline.

Businesses are still shedding positions. They're just doing it less aggressively than before. Business leaders point to a single culprit for the hiring freeze: Rachel Reeves' October Budget, which slapped employers with £25bn in additional national insurance contributions.

That levy, they argue, has transformed what might have been cautious hiring into outright retrenchment. Whether the government reverses course on those employer costs, they warn, will determine whether the jobs market stabilises or tips into a deeper slump that could see unemployment exceed pandemic-era peaks.

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The fragility of "improvement"

Jon Holt, group chief executive at KPMG, described the February data as showing "the strongest signs of improvement in three years, with hiring at its closest point to turning positive". That framing requires scrutiny. An index at 49.2 means permanent placements are still falling.

The pace of decline has eased, certainly, but the direction remains downward. Neil Carberry, chief executive of the REC, struck a more cautious note. The figures were "by no means a source of unalloyed celebration", he said, though he suggested the worst of the hiring slowdown might have passed.

What's interesting here is the conditional language throughout—might have passed, could stabilise, signs of improvement. Nobody is declaring victory.

The Budget watchdog's own forecasts tell a sobering story. The Office for Budget Responsibility expects unemployment to peak at 5.2 per cent later this year before declining to 4.1 per cent by the end of the parliamentary term. That's the official view.

JP Morgan's economists are less sanguine, forecasting the unemployment rate will reach 5.5 per cent in the coming months, surpassing the Covid-19 pandemic peak. Those aren't marginal differences. Each tenth of a percentage point represents tens of thousands of people losing their livelihoods.

Labour's £25bn gamble

Employer national insurance contributions became the centrepiece of Reeves' first Budget, raising £25bn to fund public services whilst avoiding increases to employee income tax, national insurance, or VAT. The political logic was clear: keep manifesto promises on worker taxation whilst making businesses shoulder the burden.

The economic consequences have been equally clear. Survey after survey has recorded firms citing the national insurance increase as the primary reason for hiring freezes, redundancies, and cancelled expansion plans. When businesses in the KPMG/REC survey explained why they were cutting roles, they pointed to low business confidence, economic uncertainty, and high staffing costs—all of which trace back to that October decision.

Carberry's prescription is direct: reduce the cost of doing business, which will in turn address the rising cost of living. "There is cash in the system to spend if consumers and businesses feel better," he said. The implication is that Labour's tax raid has frozen capital that might otherwise flow into wages and hiring.

The government's response has been to hold firm. Last week's Spring Statement saw Reeves insist Labour had the "right economic plan" even as growth forecasts for 2026 were downgraded.

The Treasury's position appears to be that businesses simply need to absorb the higher costs and adjust.

Geopolitical headwinds compound domestic policy

Holt warned that "resilience is now the new normal" as businesses contend with shocks beyond Westminster's control. The past month has delivered a cascade of external threats: Donald Trump's fluctuating tariff announcements, escalating conflict between the United States, Israel, and Iran that sent energy prices surging, and the broader geopolitical instability that makes long-term planning nearly impossible.

Trump first threatened NATO allies with a 10 per cent levy related to defence spending over Greenland, then floated a 15 per cent tariff on trading partners more broadly after his April levies faced legal challenges. Shevaun Haviland, director general of the British Chambers of Commerce, warned businesses to prepare for significant impact from US tariffs on UK imports.

Energy prices have spiked as Middle East tensions escalated, reviving fears of a supply crisis. Oil and gas costs jumped, threatening to feed through into broader inflation just as the Bank of England considered whether to continue cutting interest rates.

Holt said these external pressures mean the tentative signs of recovery in hiring "may stall again in the near term as chief executives take stock". Firms that might have cautiously resumed recruitment are instead holding back, waiting to see whether the global economic environment stabilises or deteriorates further.

The jobs market has reached an inflection point. The slowest pace of hiring declines in nearly two years represents either the beginning of stabilisation or a brief pause before deeper contraction. Which outcome prevails depends partly on factors beyond Britain's control—Trump's trade policy, Middle East conflict, global energy markets.

But it depends more immediately on whether Labour concludes that its £25bn national insurance increase has become economically counterproductive. Business leaders have delivered their verdict. The government must decide whether to listen before unemployment figures start making that decision for them.

More articles by Ross Williams