UNEMPLOYMENT remains at 5.2% in the UK but experts warn headcount could deteriorate in 2026 due to AI and rising inflation with “the worst yet to come”.
Estimates for payrolled employees in the UK fell by 96,000 (0.3%) between January 2025 and January 2026, but increased by 6,000 between December 2025 and January 2026, new data released today shows.
When looking at November 2025 to January 2026, the number of payrolled employees fell by 109,000 (0.4%) over the year and by 31,000 (0.1%) over the quarter.
The UK unemployment rate for people aged 16 years and over was estimated at 5.2% in November 2025 to January 2026. This is up in the latest quarter and above estimates of a year ago.
The UK economic inactivity rate for people aged 16 to 64 years was estimated at 20.7% in November 2025 to January 2026. This is down in the latest quarter and below estimates of a year ago.
The estimated number of vacancies in the UK has remained broadly flat across recent periods. Early estimates for December 2025 to February 2026 suggest a small decrease of 6,000 (0.8%), to 721,000, compared with September to November 2025.
Annual growth in employees’ average earnings in the UK was 3.8% for regular earnings in November 2025 to January 2026. Annual average regular earnings growth was 5.9% for the public sector and 3.3% for the private sector.
Liz McKeown, Director of Economic Statistics, ONS, said: “Labour market conditions were little changed at the start of the year. The number of workers on payroll rose slightly in the latest month but, overall, the recent picture has been broadly flat.
“Unemployment remains at the rate reported last month, up on the quarter and the year, while the number of vacancies remains largely stable, with declines among smaller firms being offset by rises among larger ones. Regular wage growth is at its lowest rate in more than five years, with pay growth in both the private and public sectors continuing to ease.”
The Iran war will trigger redundancies
Kate Underwood, Founder at Southampton-based Kate Underwood HR and Training, said “the Iran war will trigger redundancies because businesses can’t absorb another shock”.
She continued: “Then add the employer National Insurance hike in April. Small businesses are already on the edge. After the rise in National Insurance, they can’t take another cost increase, so they cut people. It’s not a choice, it’s survival.
“And AI makes it easier to justify. Why pay someone when software does it cheaper? Between war, tax hikes and automation, the question isn’t whether redundancies will rise in 2026, it’s how bad it gets.
“The businesses that survive will be smaller and leaner. A lot of people won’t make the cut. Redundancies aren’t a future risk. They’re happening now, and they’re about to get worse.”
Taryn Lee Johnston, Owner at Lincoln-based The FCM Group, believes the number of unemployed will rise: “Redundancies and unemployment are likely to rise because businesses are being squeezed from every direction at once. Recent increases in employer National Insurance and the National Living Wage have pushed up the cost of employing staff, just as many firms are already struggling with the ongoing cost of living crisis.
“As the conflict involving Iran drives up fuel prices, the knock-on effect will be immediate. Transport costs rise, distribution becomes more expensive, utilities increase and those costs feed through into everything. That leaves very little room for wages or staff retention.
“Not only that, but commuting will become a serious consideration as fuel costs rise. For many businesses, particularly in retail, hospitality and logistics, staffing is one of the only costs left to cut.”
We’d encourage employers not to panic
Lesley Beauchamp, Director at Nottingham-based Express Recruitment, urged businesses not to panic and to consider measures like temporary hires.
She said: “While the situation in Iran is creating some uncertainty for UK businesses, particularly in energy-intensive sectors like manufacturing and logistics, we’d encourage employers not to panic.
“Yes, costs are rising and National Insurance increases, energy prices and AI investment are all factors employers are navigating right now, but many businesses are finding smarter ways to adapt rather than reaching straight for redundancies.
“What we’re seeing on the ground is employers being more considered about their workforce planning. Temporary staffing is giving businesses the breathing room they need to manage uncertainty without making permanent decisions they might regret.
“Our message to both employers and jobseekers is to stay calm and get good advice. The labour market is resilient and businesses can come through this period.”
Riz Malik, Independent Financial Adviser at Southend-on-Sea-based R3 Wealth, is worried about the impact of AI on the unemployment number: “We have only scratched the surface of AI adoption. Larger firms are already investing heavily, but much of the UK’s small business base has yet to follow.
“A tougher economic backdrop may force that shift. As cost pressures build, businesses are likely to turn to AI for efficiency, which could mean leaner teams and reduced headcount.”
Martin Rayner, Director at Compton Financial Services, said firms are currently in the middle of a perfect storm: “UK businesses are facing something of a perfect storm, with higher National Insurance, rising minimum wages pushing up pay across the board, new employment costs and still-elevated borrowing and overheads all feeding through at once.
“The real issue is that these aren’t isolated pressures, but that together they can turn a previously profitable business into a marginal one, which is when employers start looking at cost-cutting, including redundancies.
“There had been some hope that falling interest rates would ease that pressure, but geopolitical tensions specifically in Iran could delay rate cuts and keep financing costs higher for longer.
“Continued cost pressures are likely to drive more restructuring, particularly in sectors already operating on tight margins, which will lead to job losses. The hospitality sector is likely to be one of the most affected.”
The worst is yet to come
Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, is concerned: “Sadly, the worst is yet to come as the Iran conflict will be a significant catalyst for UK redundancies in 2026. As oil prices surge, energy-intensive sectors like manufacturing and logistics face unsustainable margins, while reduced consumer spending hits retail and hospitality.
“Simultaneously, high interest rates, kept elevated by the Bank of England to fight war-driven inflation will prevent firms from refinancing debt, often forcing liquidations. But even without the geopolitical situation, domestic pressures are mounting.
“The April 2025 National Insurance hike to 15% and the lowered £5,000 threshold have made low-wage staff significantly more expensive, prompting many firms to trim headcount to stay solvent.
“2026 also marks an AI tipping point where automated agents are actively replacing junior admin roles. Combined with the new Employment Rights Act increasing the cost of hiring, these factors create a perfect storm for structural job losses and unemployment.”
Rohit Parmar-Mistry, Founder at Burton-on-Trent-based Pattrn Data, said: “A conflict-driven shock can push redundancies up via higher energy and shipping costs, supply chain disruption, and a confidence hit that freezes hiring. Even if the UK is not directly involved, firms react quickly to price volatility and delayed orders.
“Sectors most exposed are those with tight margins and high input sensitivity: manufacturing, construction materials, logistics, airlines and travel, and parts of retail. You also see knock-on cuts in professional services once clients pause projects.
“Into 2026, the bigger story may be cumulative pressure rather than one event: higher employer National Insurance, weak demand, refinancing at higher rates, and firms using AI to remove repetitive back office work.
“The risk is uneven: measurable admin roles are more likely to be reduced, while compliance, risk, and customer support can increase as disruption rises.”
Photo by the blowup on Unsplash.
