UK unemployment rate rose more than expected to 5%

Stay informed with free updates

Simply sign up Employment in the United Kingdom myFT Digest – delivered straight to your inbox.

The UK unemployment rate rose to 5 per cent and wage growth slowed in the three months to September, strengthening the Bank of England’s case for cutting interest rates next month.

The unemployment figure released by the Office for National Statistics on Tuesday was the highest in a decade, outside of the pandemic, and higher than the 4.9 per cent that economists had expected.

The rise in unemployment came after a long period of weak employment, with revised tax data showing that payroll employment has fallen by 180,000 since Chancellor Rachel Reeves announced a tax hike on employers in last year’s Budget.

The figures represent a setback for the government ahead of the Budget on November 26, when Reeves is expected to raise taxes further to plug a fiscal gap estimated by some economists at around £30 billion.

Business groups said the hiring slump reflects employers’ concerns that they will face new tax hikes even as the government moves to strengthen workers’ rights, making hiring more precarious.

“There is little comfort in this data for businesses or the government,” said Jane Gratton, deputy director of public policy at the British Chambers of Commerce. “Employers are under intense pressure due to high recruitment costs, and we are starting to see the consequences.”

In the wake of these figures, traders increased their bets on a quarter-percentage point interest rate cut at the Bank of England’s December meeting from around 60 per cent to 70 per cent, according to levels indicated by swap markets.

The pound fell 0.4 percent to $1.3127, while the yield on two-year government bonds, which is sensitive to interest rate expectations, fell 0.03 percentage points to 3.77 percent.

The number of people on the payroll fell by 117,000 people, or 0.4 per cent, in the year to September, figures on Tuesday showed. Provisional payroll figures for October showed a further decline of 32,000 during the month, bringing the annual decline to 180,000, but this figure is likely to be revised.

A separate survey by the Office for National Statistics showed that wage growth slowed in line with analysts’ expectations in the three months to September. The annual rate of growth in weekly earnings, excluding bonuses, fell to 4.6 per cent, from 4.8 per cent in the three months to August.

“The UK labor market is weakening on all fronts,” said Nye Community, chief economist at Decision Research, urging the Chancellor to “protect workers from further pain in her next Budget and avoid adding further costs to employers.”

The Bank of England’s Monetary Policy Committee kept interest rates at 4 percent in a sharp vote last week, but indicated that a cut could occur in December, if price pressures continue to ease.

Governor Andrew Bailey stressed concerns that wage growth, although slowing, may “plateau” at too high a level, but also pointed to the risks of rising job losses.

The Bank of England said it expects unemployment to peak at just over 5 percent in the second quarter of 2026.

Many economists say an income tax increase would be less harmful to the economy than additional increases that penalize employment, although it would breach Labour’s pre-election manifesto.

Employers say that if the government goes ahead with plans to restrict the tax benefits of salary sacrifice schemes, it could impact wages and employment with a similar impact to a National Insurance hike.

Pat McFadden, Secretary of State for Work and Pensions, said the figures show “exactly why we are strengthening our plan to make Britain work” through job center reforms and a campaign to help young people start their careers.

But Helen Whately, the Conservative shadow chancellor, said the rise in unemployment was the result of the Chancellor’s “bad choices” in “raising taxes on jobs, piling red tape on businesses and destroying confidence in the economy”, while households now face “more punitive tax rises”.

Additional reporting by Ian Smith and Emily Herbert in London