Data reveals 8.8% UK wage growth, but gains at risk as SMEs warn of price hikes

Wages in UK small and medium-sized enterprises (SMEs) rose sharply in February, highlighting growing pressure on employers as they prepare for incoming labour market reforms. According to Employment Hero’s latest Jobs Report, wage growth reached 8.8% year-on-year in February 2026, a significant increase from 5.6% recorded in January. The data, drawn from more than 120,000 employee records across small businesses, points to intensifying competition for talent – but also raises concerns about sustainability as costs continue to climb.

At the same time, employment growth has shown signs of recovery. Year-on-year employment rose 4.9% in February, up from 4.4% the previous month, suggesting hiring confidence is gradually returning despite ongoing economic uncertainty. The figures arrive at a pivotal moment for UK businesses, as employers prepare for changes linked to the Employment Rights Act. With regulatory pressures building, many small business leaders are already planning how to absorb rising costs.

Wage growth accelerates amid competition for talent
The sharp increase in wages reflects a labour market where employers are still competing to attract and retain staff. While recent commentary from the Chancellor suggested that households are likely to see improvements in disposable income over the current parliamentary term, the data indicates that SMEs are playing a central role in driving that trend. In particular, wage growth has been uneven across the UK, with some regions experiencing more pronounced increases. The North of England saw wages rise by 12.5% year-on-year in February, significantly outpacing the national average. This regional variation highlights the differing pressures faced by employers depending on location, sector and access to talent. However, the pace of wage growth is raising questions about how long it can be sustained. Small businesses are already dealing with rising operational costs, from energy and supply chains to compliance and staffing. For many, increasing wages further risks squeezing margins at a time when financial resilience is critical.

Rising costs prompt price increases
In response to these pressures, a growing number of small business leaders are considering passing costs on to customers. Employment Hero’s data shows that almost a third (30%) of SME leaders plan to increase prices in preparation for the Employment Rights Act reforms. While higher wages may benefit employees in the short term, price increases could offset those gains by contributing to inflationary pressures. For businesses, the challenge lies in balancing the need to remain competitive in the labour market with maintaining profitability and customer demand. This tension reflects a broader shift in the economic landscape, where businesses are being forced to rethink cost structures while navigating policy changes. For SMEs in particular – often operating with tighter margins and fewer resources – these adjustments can be more difficult to absorb.

Hiring shows cautious recovery
Alongside rising wages, the report points to a gradual improvement in hiring activity. The increase in year-on-year employment growth from 4.4% to 4.9% suggests that businesses are continuing to recruit, albeit cautiously. This steady uptick is a positive signal in the context of wider economic forecasts. The Office for Budget Responsibility (OBR) has projected that unemployment is likely to rise later this year, making the resilience of SME hiring particularly notable. Small businesses remain a key driver of employment in the UK economy, and their ability to continue hiring – even at a slower pace – provides some stability in an otherwise uncertain outlook. However, despite recent gains, employment growth remains below levels seen before April 2025. This indicates that while recovery is underway, the labour market has not yet fully regained its previous momentum.

Balancing growth with reform pressures
The upcoming Employment Rights Act reforms are expected to introduce new obligations for employers, adding another layer of complexity to an already challenging environment. While the details of implementation will shape the extent of the impact, many SMEs are already preparing for increased compliance costs and administrative demands. For some businesses, this may mean delaying hiring decisions or scaling back expansion plans. For others, it could accelerate investment in productivity or technology to offset higher labour costs. At the same time, the continued rise in wages suggests that demand for workers remains strong in certain sectors. This creates a difficult balancing act: businesses must remain attractive to employees while managing rising expenses and regulatory change.

Outlook: resilience under pressure
Taken together, the latest data paints a picture of an SME sector that is resilient but under increasing strain. Wage growth is accelerating, employment is recovering gradually, and businesses are adapting to a shifting policy landscape – but each of these trends carries its own risks. For workers, higher wages may offer some relief against the cost of living. For employers, however, the sustainability of these increases remains uncertain. The coming months will be critical as businesses respond to both economic conditions and legislative changes. Ultimately, the trajectory of SME growth will depend on how effectively businesses can balance these competing pressures. While the latest figures point to continued activity and adaptation, they also underline the challenges ahead as the UK labour market enters a new phase shaped by reform, cost pressures and evolving expectations around work.