UK unemployment rate rises to 5% as jobs market weakens
Key Takeaways:
- Tax rises are firmly back on the table — Chancellor Rachel Reeves refused to rule out increases ahead of the 26 November Budget, signalling a potential break from Labour’s election pledges.
- Economic pressures are driving the shift — Slower growth, higher borrowing costs and a widening fiscal gap have forced the Treasury to consider “tough choices” to balance the books.
- Legal and financial planning is now time-sensitive — Solicitors and advisers should prepare clients for possible changes to income tax, VAT or reliefs affecting wills, property, and estate planning.
The UK’s unemployment rate has climbed to 5.0% in the three months to September 2025, according to the Office for National Statistics (ONS) — the highest since the period covering December 2020 to February 2021.
Economists had forecast a smaller rise to 4.9%, but the increase points to clear signs that the UK jobs market is cooling faster than expected.
What the figures say
Average wage growth for the third quarter stood at 4.6%, down from 4.7% in the previous three-month period.
While the number of job vacancies remained broadly unchanged from the last quarter, they are far below pandemic-era highs, suggesting employers are hiring more cautiously.
The 5% unemployment rate marks a post-pandemic high and signals a broader shift away from the ultra-tight labour conditions that had characterised much of the UK economy over the past three years.
Why this matters
At first glance, 5% unemployment doesn’t sound alarming — but in today’s economic climate, it’s a signal of transition:
- A loosening labour market: During the pandemic recovery, there were far more vacancies than job-seekers. That imbalance is narrowing.
- Weaker wage pressure: The drop in average pay growth to 4.6% suggests employees have less leverage in pay negotiations.
- Monetary policy implications: With the Bank of England (BoE) under pressure to cut rates in December, softer labour data strengthens the case for easing.
Labour-market breakdown
Falling payrolls
ONS estimates show the number of people on company payrolls fell by around 180,000 in the year to October 2025 — a 0.6% decline and a sign that hiring momentum is stalling.
Public vs private-sector pay gap
Public-sector pay is growing at 6.6%, while private-sector pay sits at 4.2%. Analysts say government budget constraints will likely cap further public pay increases, while private-sector pay could fall further as job competition increases.
Young people and inactivity
The number of young people not in work or training continues to rise. Work and Pensions Secretary Pat McFadden expressed concern about this trend, while acknowledging that “the British economy is still generating jobs.”
Economic inactivity — people neither working nor looking for work — remains a persistent issue, complicating how the headline unemployment rate reflects the true state of the job market.
Regional and sectoral variation
Not all parts of the UK are affected equally.
- Retail, hospitality and leisure sectors — reliant on consumer spending — are particularly exposed to rising costs and slowing demand.
- Manufacturing and construction employers report delays in investment decisions amid uncertainty about future tax policy.
- London and the South East remain more resilient but are seeing slower growth than in 2022–23.
Many businesses have reportedly shelved hiring plans until the Autumn Budget is published later this month.
Policy responses and what’s next
1. Bank of England outlook
The BoE’s Monetary Policy Committee meets on 18 December to consider whether to cut interest rates. Analysts suggest that the weaker employment figures may pave the way for a rate cut to support growth.
2. Government fiscal policy
With unemployment rising and wages stagnating, pressure will mount on Chancellor Rachel Reeves to introduce pro-growth measures in the 26 November Budget.
Businesses are lobbying for relief on National Insurance contributions and fewer administrative hurdles to hiring.
3. Workforce upskilling
Experts say upskilling and retraining will be essential to help workers move into new sectors. Policies supporting apprenticeships, digital skills, and re-entry training for the economically inactive could mitigate rising joblessness.
Impact on households and job-seekers
For British households, this shift in the jobs landscape has tangible effects:
- Pay rises harder to secure: Wage growth is slowing, especially outside the public sector.
- Job competition increasing: A cooling labour market means fewer openings per applicant.
- Real incomes still squeezed: Even modest pay rises may not keep pace with living costs.
- Sectoral risk: Lower-income or hourly workers in services face greater insecurity.
- Need for adaptability: Upskilling and retraining will be key for staying employable.
Legal and regulatory spotlight
For Parachute Law readers — practical employment-law insights:
1. Redundancy and employee rights
A rising unemployment rate often precedes higher redundancy activity. Employers planning redundancies must follow fair consultation and selection procedures, provide statutory redundancy pay, and offer suitable alternative roles where possible.
Employees who believe they’ve been unfairly selected can bring a claim before an employment tribunal.
2. Benefits and training entitlements
As joblessness rises, more people may rely on Universal Credit or Jobseeker’s Allowance. Legal advisors should remind claimants of eligibility rules, reporting obligations, and available retraining programmes to help them re-enter the workforce.
3. Insolvency and business closures
If small businesses are unable to withstand higher costs, insolvencies may rise. Workers are entitled to statutory redundancy pay, holiday pay, and unpaid wages from the Insolvency Service’s Redundancy Payments Office when their employer becomes insolvent.
4. Employment-contract compliance
With cost pressures and regulatory scrutiny increasing, businesses should ensure their contracts comply with minimum wage, working-time, and zero-hours legislation. Employees moving sectors should review non-compete clauses and ensure new contracts protect key rights.
Risks and outlook
- Further unemployment increases
- If hiring continues to slow, unemployment could rise to 5.5% or more by early 2026.
- Wage deceleration
- Average earnings growth could slip below 4%, limiting disposable income growth.
- Regional inequality
- Northern regions and parts of Wales remain more exposed to job losses in consumer-facing sectors.
- Business confidence
- High borrowing costs and regulatory uncertainty could deter investment and hiring.
- Automation and AI
- Structural shifts like automation and AI adoption could further suppress demand for low-skill roles, particularly in logistics, manufacturing, and administration.
Expert commentary
Yael Selfin, chief economist at KPMG UK, said public-sector pay growth is “approaching a peak” as last year’s large settlements are unlikely to be repeated amid tighter fiscal conditions.
Richard Carter, head of fixed-interest research at Quilter Cheviot, said many firms have paused hiring because “having already faced significant rises in national insurance, they are nervous to make real commitments until the Budget clarifies costs.”
Tina McKenzie, policy chair of the Federation of Small Businesses, warned that small firms are being “choked by ever-increasing regulation, litigation and tax,” and called on the government to “take action that backs jobs and growth.”
What workers can do now
- Stay informed: Keep track of the Budget and BoE decisions, which directly affect employment and interest rates.
- Review contracts: Ensure clarity on redundancy pay, notice periods, and severance terms.
- Upskill: Explore funded training opportunities or digital skills courses to boost employability.
- Seek advice early: If facing redundancy or unpaid wages, consult an employment solicitor promptly to understand rights and time limits.
Conclusion
The rise of UK unemployment to 5% underscores a significant cooling in what had been a robust labour market.
For policymakers, this creates a tightrope: cutting rates too soon risks reigniting inflation, but waiting too long could deepen unemployment.
For businesses, cost management and workforce planning will dominate boardroom discussions through 2026.
For workers, adaptability and legal awareness are crucial — knowing your rights and keeping skills sharp will be the best defence against uncertainty.
Whether this marks a temporary wobble or the start of a more sustained slowdown will depend on how effectively the government balances growth, fiscal restraint, and fairness in the months ahead.
For legal help with redundancy, employment disputes, or contract advice, contact Parachute Law’s employment team.
We help employees and businesses navigate changing labour-market conditions with practical legal guidance and fair outcomes.
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