Why UK SMEs are facing labour shortages

Let’s skip the usual opening paragraph that blames Brexit.

You’ve heard it. You’ve said it, probably. And if you’re honest with yourself, you know it’s only part of the story.

Because the truth of what’s happening to the UK workforce right now is bigger, stranger, and more fixable than most people realise. And for SME owners like you, there’s a very practical thread running through all of it.

Bear with us. The stats in here might change the way you think about your business.

 

First, the numbers. Because they’re quite something.

If you’ve been struggling to recruit over the past few years, you are absolutely not alone.

1 in 3

of UK businesses are still experiencing labour shortages, even as job vacancies have started to fall from their post-pandemic peak.

2.8 million

UK workers are currently out of work due to long-term sickness. That’s not a rounding error. That’s the population of Birmingham, Manchester and Leeds combined.

9 million

people aged 16 to 64 in the UK are economically inactive, meaning they are neither working nor looking for work.

148.9 million

working days were lost to sickness absence in the UK in 2022, the most recent full-year ONS figure. The trend since then has not improved.

And here’s the one that should really make you sit up:

The UK is the only G7 country whose workforce is still smaller than it was before Covid. Every other major economy has recovered. We haven’t.

These pressures explain why labour shortages UK SMEs are dealing with aren’t easing anytime soon

That’s not a blip. That’s a structural problem. And it’s sitting right in the middle of your hiring strategy.

 

So why can’t you find staff?

The honest answer is: several reasons at once, and most of them are interconnected.

1. People are unwell, and the queue to get better is very, very long

This is the big one that doesn’t get talked about enough.

The NHS waiting list in England currently stands at around 7.2 million cases, according to the latest NHS England RTT data for April 2026. Of those, approximately 2.53 million people have been waiting longer than the 18-week constitutional target. Around 100,000 have been waiting over a year.

To put that in perspective: the NHS last hit its 18-week target in November 2015, when the waiting list stood at 3.5 million. It has since doubled.

And waiting times for core diagnostic tests, the MRIs and X-rays that determine whether someone needs surgery, have risen 12% in the past year alone. By January 2026, 1.81 million patients were still waiting for diagnostic tests, with a quarter of them waiting more than six weeks just to find out what’s wrong.

These aren’t just NHS statistics. These are your employees. These are the people you’re trying to recruit. Many of them are sitting in a queue, in pain or discomfort or anxiety, unable to work at full capacity, or not working at all.

The Health Foundation has found that nearly one in four people who are economically inactive due to ill health actually want to return to work but can’t. They’re not choosing the sofa. They’re waiting for treatment.

Nearly 1 in 4

of economically inactive people say NHS waiting lists are part of the reason they haven’t returned to work.

2. The workforce is ageing, and the pipeline isn’t keeping up

This is a slower-burning problem but no less significant.

In manufacturing alone, 21% of the workforce is currently aged 55 or over. Within a decade, those people retire. Meanwhile, apprenticeship starts in manufacturing fell 12% between 2019 and 2023. Engineering and manufacturing technology applications at university are down 8% since 2019.

This pattern repeats across sectors. The people who know how to do things are leaving. The people coming through don’t have the same depth of experience. And businesses are competing over a shrinking pool of fully-formed talent, rather than investing in growing their own.

3. Wages are rising, but real pay is falling

April 2025 brought a significant increase in employer National Insurance contributions, adding an estimated £25 billion a year in costs across UK businesses. The National Living Wage has risen. Fiscal drag means employees are paying more tax on what feels like a pay rise. The net effect is that businesses face higher wage costs while employees feel no better off.

This is creating a peculiar stand-off: employers can’t afford to pay more without squeezing margins, and employees feel like they’re being asked to work harder for less. Neither side is wrong. Both sides are losing.

4. Benefits matter more than they used to

This one is directly relevant to your recruitment pipeline.

According to a Howden Employee Benefits and YouGov report, 77% of UK SMEs are planning changes to their benefits packages. Why? Because jobseekers have got specific about what they want. And salary alone isn’t doing the job anymore.

When candidates are weighing up two similar roles, the benefits package is increasingly what tips the decision. Health insurance, mental health support, and flexible working have moved from ‘nice-to-have’ territory into genuine deciding factors.

 

The NHS connection: why this matters more than you think

Let’s zoom in on the health piece, because it’s where the labour shortage problem and the thing you can actually do about it intersect.

The recruitment and Employment Confederation estimates that if UK labour shortages are not addressed, the cost to the UK economy will reach £39 billion a year from 2024 through to 2027. That’s the macro picture. But here’s the micro one:

50%	of businesses say shortages have made it harder to meet customer service objectives.

48%	of businesses say shortages have pushed their operating costs up.

(Source: DfE Employer Skills Survey)

Now here’s the connection most people miss.

The businesses that are getting ahead of this, the ones that can hire, retain, and recover when someone gets ill, are not doing anything exotic. They’re simply making it easier for their people to get seen by a doctor quickly.

You cannot fix the NHS. But you can make sure your employees don’t have to rely on it alone.

Private medical insurance, via an employer-funded group policy, gives your team access to:

• A digital GP, often available the same day or next day, without the two-week wait for a GP appointment

• Specialist consultations, typically within days rather than months

• Diagnostic tests, including MRIs, without waiting for an NHS referral chain

• Mental health support, which matters enormously given that 875,000 UK workers reported work-related stress, depression or anxiety in 2024

• Physiotherapy and other treatment, meaning musculoskeletal issues (a top cause of long-term absence) get addressed before they become serious

• Cancer cover, so that if the worst happens, treatment starts fast

The result? Employees who get ill come back to work sooner. Employees who are worried about their health get reassurance quickly. And the people you’re trying to recruit can see, very clearly, that you’re an employer who actually gives a damn about them.

 

What this costs, and what it saves

Let’s be straightforward about the money, because this is where a lot of SME owners switch off, assuming it’s out of reach.

It isn’t.

For most small businesses, employer-funded PMI costs somewhere between £40 and £80 per employee per month. For a team of ten, that’s between £400 and £800 a month in total, or between £4,800 and £9,600 a year.

Now compare that with the cost of replacing someone.

£5,000 to £10,000

is the estimated cost of replacing an employee, when you factor in recruitment fees, advertising, interviewing time, onboarding, training, and lost productivity during the gap. (CIPD)

If PMI prevents even one resignation a year, the policy has paid for itself. If it cuts long-term absence and gets someone back to work a few weeks earlier, it’s paid for itself again.

Premiums are also a legitimate business expense, deductible against corporation tax. So the net cost is lower than the headline figure.

The ABI reports that a record 4.7 million people are now covered by employer-funded PMI schemes in the UK, the highest figure in over 30 years. PMI-funded private health admissions hit a new record high in the first three quarters of 2025, up 16% compared with pre-pandemic levels. That’s not coincidence. That’s businesses waking up to the maths.

A note on what’s driving demand

Broadstone’s analysis of FCA data found that 14% of UK adults, around 7.6 million people, now hold private medical insurance, up from 6.7 million in 2020. The fastest growth is coming from the employer side. Corporate-paid cover is driving the market because employers are using it to solve a very real problem: keeping people healthy, keeping them in work, and making their business a place where people want to stay.

 

What about recruitment specifically?

Beyond the retention angle, there’s a straightforward recruitment case to make.

According to a Howden and YouGov survey, 29% of SMEs identify recruitment and retention as a significant challenge. The same research found that PMI is currently offered by only 53% of SMEs. That means nearly half of small businesses are competing for talent without one of the most valued non-salary benefits on offer.

Think about what that means in practice. Two businesses, similar size, similar sector, similar salary. One offers private health cover. The other doesn’t. The candidate with any sense of self-preservation knows which one to choose.

A small recruitment agency that introduced a PMI scheme reportedly saw a 30% increase in qualified applications within six months, and a 15% drop in employee turnover in the first year. New hires cited the health cover as a significant factor in their decision to join.

That’s not unusual. It’s increasingly the norm.

53% of UK employees have moved jobs to access better benefits. Health insurance sits at the top of the list.

So what should you do?

If you run a small business with somewhere between 5 and 50 staff, and you’ve never properly looked at company health cover, here’s what we’d suggest:

• Don’t assume it’s unaffordable. The numbers are more accessible than most people think, and the tax treatment helps.

• Don’t assume your current cover (if you have it) is the best available. Renewal prices often creep up year on year. A quick review can save money and often improve the cover at the same time.

• Do think about it as a recruitment and retention tool, not just an insurance product. It changes the conversation when you’re interviewing.

• Do consider the mental health component. It’s increasingly central to employee wellbeing and increasingly expected by working-age employees.

• Do talk to an independent broker who works with businesses like yours day in and day out, rather than going direct to an insurer and getting a one-size-fits-all quote.

A final thought

The labour shortage is real. It’s not going away quickly. The NHS is doing its best with an impossible task, but the waiting list is not going to be fixed before you next need to hire.

What you can control is the environment you create for your people. How quickly they can see a doctor. How fast they come back after an illness. Whether they feel like their employer genuinely cares about them, or whether they’re quietly updating their CV while they wait 18 weeks for an appointment.

The businesses that are navigating this well aren’t doing anything complicated. They’re just thinking slightly ahead.

You can’t compete on salary alone in this market. But a well-structured health plan levels the playing field, and then some.

Jacob at Insure My Health works with SMEs across the UK to find the right cover at the right price, from Bupa, Aviva, AXA Health, Vitality and more. No jargon, no pressure, just a straight conversation about what makes sense for your business.

 

Book a call or request a call back at insuremyhealth.uk

Or drop Jacob a message directly, he’s the one who actually picks up the phone.

https://tinyurl.com/Chat-With-Jacob

Sources & References

NHS England RTT Waiting Times data, April 2026 | BMA NHS Backlog Data Analysis, June 2026 | ONS Labour Market Overview 2025 | Howden Employee Benefits / YouGov SME Benefits Survey 2024 | Datum RPO UK Labour Shortages Report 2025 | REC Labour Market Analysis | DfE Employer Skills Survey | ABI Group PMI Statistics 2023 | Broadstone / FCA Financial Lives Survey Analysis 2024 | CIPD UK Resourcing and Talent Planning Report 2024 | Health Foundation Economic Inactivity Analysis | Manpower Group 2025 Talent Shortage Report | Employment Hero / YouGov Worker Attitudes Survey, August 2025

Insure My Health is a trading style of Parkway Mortgages Ltd (FCA No: 496104), an Appointed Representative of The Right Mortgage and Protection Network. Private medical insurance is not regulated by the FCA.