Employers are preparing to lay off more staff as higher payroll costs from taxes and red tape are hitting headcount expectations, an industry survey has found.
The Institute of Directors’ monthly business confidence survey showed that headcount expectations dropped in December after Rachel Reeves’ Budget unveiled a salary sacrifice cap and higher taxes on airports and pubs.
The net reading dropped from -17 in November to -21, setting the scene for another year of rising unemployment and falling vacancy numbers.
Researchers at the top industry body said strengthened workers’ rights in the Employment Rights Bill, which is set to kick into effect this year, and the ripple effects of higher payroll taxes would force employers to think twice about taking on more staff.
“Hiring freezes remain widespread, amidst concern over further cost increases in the latest Budget and the direction of travel for the Employment Rights Bill,” said Anna Leach, chief economist at the IoD.
“When asked about the factors that would have the greatest impact on business confidence in 2026, top of the list were a lower tax burden and scaling back the proposed changes to employment law.
“More promisingly, improvements in regulation, trade deals with the EU, lower tax complexity and lower business costs were also high up the list – areas where the government has stated ambitions and where tangible progress could begin to rebuild confidence.”
The IoD’s survey also showed investment intentions falling while export and revenue forecasts across firms were little changed.
The headline figure for business confidence in the survey measuring directors’ confidence in the UK economy climbed to a score of -66 from a pre-Budget reading of -73.
Business leaders’ confidence in their own organisations hit a reading of -5.
Leach warned that the readings remained around the “record lows” seen during the pandemic.
Employers wait on Labour’s next move
The latest set of figures may bring some relief to Labour government officials, who have made growing the UK economy their number one mission.
Starmer has singled out three areas of economic policymaking that he believes could reverse the UK’s economic fortunes: planning, trade with the EU and welfare.
On Sunday, the Prime Minister suggested joining the EU’s customs union would undermine trade deals struck with the US and India.
Instead, he said the UK should look for “closer alignment” on the single market, otherwise the free movement of goods, services and people across most of Europe.
The issue of free movement was a sticking point during Brexit referendum debates, though the Labour government has set out plans to create a capped youth mobility scheme for young adults to work and study in the UK and on the continent.
Another area of contention around Starmer’s plans that could see widespread opposition would be in plans to reduce the UK inactivity rate, currently at 21 per cent, and get more Brits into work.
Different reviews into welfare led by former health secretary Alan Milburn and disability minister Stephen Timms are set to be published in the coming years, laying out plans to encourage people to join the national workforce.
But efforts to make welfare savings and limit benefits could anger some voters and backbenchers in a repeat of last year’s giant Labour rebellion over disability payment cuts.