The Employment Rights Bill is Coming... ...and Britain's SMEs Need a Lifeline

Britain is home to 5.5 million small and medium-sized businesses. They are the lifeblood of our economy, making up 99.9% of all UK businesses and employing nearly 16.7 million people. But they're facing a perfect storm: rising costs, a challenging economic climate, and a wave of new legislation means that, for many, the margins for survival are shrinking.

Research suggests the number of companies in "critical" financial distress has surged more than 20% in the last year. Meanwhile, the Employment Rights Bill - set to roll out from September - will deliver sweeping reforms to the workplace, making the operating environment for small businesses even tougher.

While the changes will strengthen protections for workers, they also bring significant new compliance considerations for employers. For smaller firms already under strain, this could be challenging - unless government and industry step up to give SMEs the support they need.

The economic squeeze is tightening
Among the many pressures squeezing small businesses is the tax burden: employer National Insurance contributions rose from 13.8% to 15% in April this year, adding hundreds of pounds to the cost of each employee. At the same time, the secondary threshold for employer NI dropped from £9,100 to £5,000, meaning more staff are subject to higher payroll taxes.

According to the British Chambers of Commerce, 63% of firms now cite taxation as a primary concern: the highest level since 2017. The impact is real: a Premium Credit survey found that 19% of SMEs have already laid off employees to afford tax payments. And wider policy shifts are further eroding margins. In April, the business asset disposal relief (BADR) capital gains tax rate increased from 10% to 14%, making it harder for owners to invest in or exit their businesses. Business rates relief for retail, hospitality, and leisure dropped from 75% to 40%, hitting sectors that are still recovering from the pandemic.

These changes have consequences: business confidence has slipped to its lowest point since the 2022 mini-budget. While 55% of firms expect to raise prices in the coming months, just 20% increased investment in the last quarter, and a quarter have cut back spending altogether. 57% of SMEs expect their costs to rise in the next quarter, with nearly half facing ongoing cash flow challenges. SME confidence is at a five-year low, with only 26% predicting growth.

This combination of rising prices, low growth, and weak investment has already put SMEs in a difficult position. Now, they must grapple with one of the biggest employment law shake-ups in a generation: the Employment Rights Bill.

How will the Employment Rights Bill impact SMEs?
The Bill's measures will benefit workers and employers for the better. In a survey of over 500 SME bosses carried out by our team at Breathe HR, 68% predicted it will boost productivity, and 69% said it will improve retention. But for smaller employers, it also brings administrative, legal, and financial changes which will take work and planning to implement.

Some of the headline changes being brought about by the Bill include:

• Day-one right to claim unfair dismissal: removing probationary periods and increasing the risk and cost of hiring
• Expanded sick pay and parental leave rights: extending eligibility and protecting workers, whilst raising payroll costs and admin requirements
• Ban on exploitative zero-hour contracts: a positive change, but one that may have implications for sectors that rely heavily on flexible staffing
• Stricter redundancy, flexible working, and harassment rules: requiring policy and contract overhauls

Estimates suggest compliance will cost businesses up to £5 billion a year, with SMEs expected to shoulder 60% of that burden. Three quarters of small employers are concerned about the unfair dismissal changes, while 74% worry about expanded statutory sick pay. Two-thirds say these reforms will make them more cautious about hiring.

What SMEs need now
Not every legislative change proposed in the Employment Rights Bill will come into effect at once. But developments are expected from September 2025 until 2027, meaning SMEs need support now in order to adapt.

1. Smarter financial support
The government has already teased a voucher scheme to help businesses access subsidised HR advice. But businesses don't just need insights: they need cash. In our survey, 51% said they would benefit from government funding and grants to help with the cost of implementing Employment Rights Bill changes. There are other types of financial support that would help, too. Strengthening the British Business Bank and schemes like the Growth Guarantee Scheme could help SMEs invest in compliance without cutting back on growth plans, but support must be made available quickly if it's to have an impact in time; and mustn't be subject to one-size-fits-all restrictions.

2. Practical HR support
Proactive preparation is key if SMEs are to successfully navigate employment law changes. Here a few things small businesses can do now to prepare:

• Get the basics right: Are essential tasks like booking time off, requesting flexible work and running performance reviews streamlined? HR technology can automate HR admin, freeing owners up to focus on strategy, compliance and growth
• Refresh contracts and policies: Start early to get ahead and future-proof your HR function in line with new laws. Starting your policy audit now will reduce your workload later on
• Communicate changes clearly to staff to set expectations. Explain how changes will impact them and signpost what they can do if they have concerns to maintain trust and avoid any unexpected surprises
• Invest in training: Our survey found that 40% wanted training for leaders and managers on new employment rights. Support senior staff to handle flexible working requests, redundancy processes, and harassment complaints correctly
• Consider external expertise: HR consultants or legal advisors can help you avoid costly mistakes and can save you time

3. Better signposting to support
Too often, SMEs miss out on available help because the ecosystem is fragmented. Any support offered by the government or industry needs to be easy to navigate and tailored to the needs of small businesses. The new Business Growth Service - a single digital gateway for funding, advice, and export support - is a step in the right direction. But greater clarity is still needed to empower small businesses to make the most of support quickly as the Employment Rights Bill looms.

If you have a skeleton HR team - or run HR yourself as a business owner - speaking to a trusted expert can be a useful way to navigate the system and ensure you're not missing out on help you're eligible for. The Employment Rights Bill brings important protections for workers, but without a thoughtful, SME-friendly approach, it risks stifling businesses that power growth, innovation, and millions of jobs. A thriving SME economy benefits everyone. Now is the time for government, industry, and service providers to work together to give small businesses not just the means to comply, but the space to grow.