Redundancy has become a pressing issue for UK employers in 2025. Between June and August 2025, organisations reduced headcount at a 0.5% annual rate—the fastest pace since 2021. This rise in redundancies is linked to the £25 billion increase in employer National Insurance Contributions (NICs) introduced in April 2025, alongside broader economic pressures.
For small and medium-sized enterprises (SMEs), navigating redundancy is particularly challenging. Unlike larger corporates, SMEs often lack deep financial reserves and HR capacity. Decisions around redundancy can have far-reaching consequences, from employee morale to business reputation. Understanding both the reasons behind rising redundancies and the process to follow is essential for business leaders right now.
Why Are Redundancies Rising in 2025?
1. The NICs Increase
The April 2025 rise in employer NICs has added significant payroll costs. For labour-intensive sectors such as hospitality, retail, and care, this has been especially painful. Employers are being forced to revisit workforce planning, with redundancy emerging as a cost-cutting measure when other efficiencies can’t be found.
2. Economic Uncertainty
Redundancy is often a symptom of broader economic pressures. With inflation, slower consumer demand, and political change all contributing to uncertainty, businesses are freezing recruitment and scaling back wages. In some cases, redundancy programmes are being used pre-emptively to safeguard profitability.
3. Pressures on SMEs
SMEs are particularly vulnerable. They typically operate on tight margins and may not have the luxury of long consultation periods or redeployment opportunities. For many, redundancy decisions are being driven not by choice but by financial necessity. That makes it even more important to consider alternatives before making cuts.
The Impact of Redundancy on SMEs
Redundancy isn’t just a financial decision—it has human, cultural, and legal consequences.
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Morale: Employees who remain after a redundancy round may feel insecure, disengaged, or resentful. This can harm productivity and retention.
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Reputation: Poorly managed redundancies can damage an employer’s reputation in the local market, making it harder to recruit in the future.
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Compliance risks: Mishandling redundancies exposes SMEs to legal claims for unfair dismissal, which can be costly in both time and money.
In short, redundancy might save money in the short term, but without proper planning and process, it can create long-term challenges.
The Redundancy Process SMEs Must Follow
If redundancy is unavoidable, employers must follow a fair and legally compliant process. Cutting corners increases the risk of tribunal claims. The redundancy process typically involves:
1. Establishing a Genuine Redundancy Situation
Redundancy is only lawful if the role is genuinely no longer required—this may be because of reduced demand, workplace closure, or business restructuring. Employers must be able to demonstrate the business rationale behind the redundancy.
2. Consultation
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Fewer than 20 redundancies: Employers must consult individually with each affected employee.
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20 or more redundancies: A collective consultation process is legally required, involving employee representatives or trade unions.
Consultations must be meaningful. This means genuinely considering alternatives before reaching a decision.
3. Fair Selection Criteria
If only some roles are being made redundant, employers must use objective, transparent criteria for selection (e.g., skills, qualifications, performance, disciplinary records). Discrimination based on age, gender, disability, or any protected characteristic is unlawful.
4. Considering Alternatives to Redundancy
Employers must explore redeployment opportunities, flexible working, or voluntary redundancy. Failure to consider these options can render the process unfair.
5. Notice and Redundancy Pay
Employees with two or more years’ service are entitled to statutory redundancy pay, which is calculated based on age, length of service, and weekly pay (capped at £719/week in 2025). Employers must also give the correct notice period—either contractual or statutory.
6. Right of Appeal and Support
Employees should have the right to appeal redundancy decisions. Providing support such as outplacement services, CV workshops, or wellbeing assistance demonstrates good practice and helps maintain morale among remaining staff.
Important: Failing to follow the redundancy process correctly can lead to claims of unfair dismissal, financial penalties, and reputational damage.
Alternatives to Redundancy
Redundancy should be a last resort. SMEs should carefully consider other cost-saving strategies first:
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Flexible Working Schemes: Reducing hours, offering hybrid work, or job-sharing can lower costs while retaining skills.
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Phased Pay Reviews: Instead of large pay rises, implement staged increases linked to company performance.
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Non-Financial Benefits: Wellbeing initiatives, career development opportunities, or additional holiday days can boost retention at low cost.
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Payroll Planning: Review NICs obligations and explore any government relief or grant schemes.
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Scenario Planning: Use workforce modelling to test financial strategies before making redundancy decisions.
By exploring these alternatives, SMEs can often reduce financial pressure without losing valuable employees.
Frequently Asked Questions (FAQs)
Q1. Why are redundancies increasing in 2025?
The April 2025 NICs hike has added £25 billion in costs for employers. Combined with slowing growth, redundancies are being used to cut costs.
Q2. How does redundancy affect SMEs?
Redundancy can provide short-term savings but risks morale, productivity, and legal disputes if not handled correctly.
Q3. What is the redundancy process employers must follow?
Employers must consult staff, use fair and objective selection criteria, consider alternatives, issue proper notice, pay redundancy entitlements, and provide appeal rights.
Q4. What alternatives to redundancy are available?
Options include flexible working, phased pay increases, payroll planning, and offering non-financial benefits.
Q5. What are the risks of mishandling redundancies?
Poorly managed redundancies can result in unfair dismissal claims, reputational harm, and difficulties recruiting in the future.
Conclusion
The rise in redundancies in 2025 shows how economic pressures are reshaping the workforce. For SMEs, redundancy should be seen as a last resort—used only when there is a genuine business need and after all alternatives have been considered.
By following the proper redundancy process and seeking expert advice, SMEs can minimise legal risk, protect morale, and preserve their reputation as fair employers.
At Kingswood Group, we guide SMEs through redundancy planning, consultation, and compliance. Whether you need advice on alternatives, support during consultation, or help managing the redundancy process, we’re here to ensure fair and legally sound outcomes.
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