The struggle to recruit and retain skilled employees continues to be one of the biggest obstacles for UK SMEs in 2025. According to Lloyds Banking Group, 29.5% of SMEs report recruitment difficulties, with many losing out to larger companies offering better salaries and perks. The Institute of Directors (IoD) highlights particularly severe challenges in technology and skilled trades, areas critical to future growth.
“Our members are finding it harder to fill vacancies, with wage pressures adding to their cost base,” said Anna Leach, IoD Chief Economist.
This pressure is compounded by the recent rise in employer NICs, which adds around £900 per employee annually. For smaller firms, this has forced difficult trade-offs between new hires and essential investments in growth. The result is a talent pipeline that is narrowing when SMEs need it most.
The government’s 2025 skills reform, which promised expanded apprenticeships and greater training support, has so far underwhelmed. A Department for Education report shows that just 12% of SMEs have successfully accessed apprenticeship funding, citing confusing processes and lengthy paperwork.
The regional divide is also stark. In the South West, smaller IT firms and manufacturers report losing skilled workers to larger employers in Bristol and London. As one Birmingham tech founder admitted: “We can’t match salaries, so we’re losing developers to bigger players.”
Some SMEs are trying to innovate—offering remote work flexibility, equity incentives, or enhanced training opportunities. While these help, they rarely close the gap with corporate giants.
The CBI warns that unless action is taken, SME growth will stall, with serious consequences for productivity and innovation across the wider economy. “Skills shortages are a handbrake on ambition,” Leach said.
For SMEs, the path forward may lie in collaboration—working with local education providers, lobbying for streamlined funding access, and building strong employer brands. Without such measures, the UK risks an SME sector held back not by lack of ambition, but by lack of people.