The UK labour market closed 2025 under pressure, with both permanent and temporary hiring falling in December and unemployment reaching a four-year high.
A survey by KPMG and the Recruitment and Employment Confederation (REC) revealed that permanent staff placements fell to a four-month low, while temporary roles also declined. Job vacancies continued to drop, and the availability of workers increased sharply, signalling a labour market that is loosening rather than recovering.
The slowdown reflects lingering uncertainty from November’s Budget, as employers brace for higher taxes and rising payroll costs. In addition to national living wage increases, lower National Insurance thresholds are adding to firms’ financial burdens.
Neil Carberry, chief executive of the REC, said December’s data indicated further deterioration compared with November, with permanent hiring falling at its fastest pace since August. “Making this a better year for hiring will require a focus on rebuilding business confidence,” he said. “With the Budget behind us, firms need a clear and credible direction from government, from industrial strategy to a more pragmatic approach to employment legislation.”
Unemployment hit 5.1 percent in the final quarter of 2025, the highest level since 2021. Economists surveyed by The Times expect the rate could rise to 5.5 percent in 2026, a level not seen in over a decade.
Despite the slowdown, expectations remain that the Bank of England may reduce interest rates no more than twice this year. Lower borrowing costs could ease hiring and investment pressures, but policymakers remain cautious amid ongoing inflation.
Data from the Bank of England shows that businesses plan to cut headcount in 2026, while wage settlements are expected to edge down slightly, from 3.8 percent to 3.7 percent. The REC survey showed pay for permanent staff increased at the fastest rate since May, suggesting inflationary pressures have not fully eased. Temporary staff wages also rose in December after two months of stagnation, though overall growth remains below long-term averages.
Regionally, the Midlands was the strongest performer, registering growth in temporary placements, while hiring continued to fall across London and much of northern and southern England.
In London’s financial services sector, recruitment firm Morgan McKinley reported a 16 percent drop in vacancies in the final quarter of 2025. However, overall job numbers in the sector were still 16 percent higher year-on-year, highlighting the uneven nature of the labour market.
The data paints a picture of a labour market under strain: declining hiring, rising unemployment, and persistent cost pressures are creating uncertainty for both employers and workers as the UK enters 2026.