How the Employment Rights Act Affects Your UK Hiring Budget in 2026 and 2027
The Employment Rights Act 2025 raises UK hiring budgets in three places: payroll and statutory pay costs from April 2026, legal and administrative risk from October 2026, and the cost of a wrong hire from January 2027. The UK government's own impact assessment put the total cost to business at up to £5 billion a year. For an individual employer, the biggest budget shift is not a new line item. It is that dismissing someone becomes harder and more expensive, so the money you spend qualifying candidates before you hire them is now worth considerably more than the money you spend generating applications.
This guide maps each provision of the Act to the recruitment budget lines it affects, shows a worked example, and sets out what UK hiring teams are actually changing in response.
What is the Employment Rights Act 2025?
The Employment Rights Act 2025 is the UK government's package of employment law reform. It received Royal Assent in December 2025 and is being implemented in phases through 2026 and 2027 rather than all at once. It does not create a single new recruitment tax. It changes the risk profile of employing people, and that risk shows up in hiring budgets as higher statutory pay costs, longer legal exposure windows, and a much higher penalty for hiring the wrong person.
When does each change take effect?
Date | Change | Budget impact |
|---|---|---|
6 April 2026 | Statutory sick pay from day one of illness, with the three day waiting period and the lower earnings limit removed | Payroll |
6 April 2026 | Paternity leave and unpaid parental leave become day one rights | Payroll and cover costs |
6 April 2026 | Collective redundancy protective award capped at 180 days | Exit costs |
7 April 2026 | Fair Work Agency established as a single enforcement body | Compliance |
1 October 2026 | Employment tribunal time limits extend from three months to six months for most claims, and 9 November 2026 in Scotland | Legal reserve |
30 October 2026 | Duty to take all reasonable steps to prevent sexual harassment, plus liability for third party harassment | Compliance and training |
1 January 2027 | Unfair dismissal qualifying period falls from two years to six months, and the statutory cap on unfair dismissal compensation is removed | Cost of a wrong hire |
1 January 2027 | Fire and rehire protections take effect | Restructuring costs |
During 2027 | Guaranteed hours offers for zero hours and low hours workers, based on a 12 week reference period, plus reasonable shift notice and payment for cancelled shifts | Flexible workforce costs |
During 2027 | Agency workers brought into the guaranteed hours and shift notice regime | Agency and temp costs |
Dates for the 2027 measures are set out in the government's implementation roadmap and the detailed regulations are still being finalized, so treat the 2027 rows as directional for planning purposes.
How much will the Employment Rights Act cost UK employers?
The Department for Business and Trade estimated the cost to business at up to £5 billion a year, describing the recurring cost as being in the low billions of pounds per year. The assessment also found the burden falls proportionately harder on small and micro businesses, because the fixed administrative and compliance element does not scale down with headcount.
Employers expect to feel it. In the CIPD's Winter 2025/26 Labour Market Outlook, based on a YouGov survey of 2,082 senior HR professionals and decision makers with fieldwork between 18 December 2025 and 17 January 2026:
74% of employers expect their employment costs to increase as a result of the Act, and 17% expect them to increase to a large extent.
37% of employers plan to reduce their recruitment of permanent staff because of the reforms.
Social care (31%) and hospitality (28%) had the highest share of employers expecting a large cost increase.
55% of employers expect workplace conflict to increase.
The net employment balance stood at +7, the lowest on record outside the pandemic. Among employers cutting hiring because of the Act, it was -5.
Which budget lines actually move?
Payroll and statutory pay
From 6 April 2026 statutory sick pay is payable from the first day of sickness rather than the fourth, and the lower earnings limit no longer applies, so part time and low paid staff previously excluded now qualify. For a high volume employer with a large frontline population, this is the most predictable new cost in the Act, and it scales directly with headcount and absence rate.
It sits on top of payroll changes unrelated to the Act that land in the same budget. Employer secondary Class 1 National Insurance is 15% on earnings above a £5,000 annual secondary threshold for 2026/27, with the Employment Allowance at £10,500. The National Living Wage is £12.71 an hour for workers aged 21 and over from 1 April 2026, with £10.85 for 18 to 20 year olds and £8.00 for under 18s and apprentices.
Legal reserve and administration
From 1 October 2026 the window for most employment tribunal claims doubles from three months to six months. Add the early conciliation period and an employer may not learn of a claim for the best part of a year after the event. That lengthens the period over which you hold documentation and reserve against exposure, and it makes the quality of your hiring and dismissal paperwork a financial matter rather than an administrative one. The Fair Work Agency, established on 7 April 2026, consolidates enforcement into one body with inspection powers and the ability to look back six years on underpayments.
The cost of a wrong hire
This is the change that reshapes recruitment budgets rather than simply inflating them. From 1 January 2027 an employee can bring an unfair dismissal claim after six months of service instead of two years, and the statutory cap on the compensatory award, previously £123,543, is removed entirely. The window in which an employer can part company with a poor hire on relatively simple terms shrinks from twenty four months to six, and the worst case cost of getting it wrong is no longer bounded.
A hiring process that lets unsuitable candidates through has always been expensive. From January 2027 it is expensive in a way that appears on a legal budget rather than a recruitment one.
Flexible workforce costs
During 2027, workers on zero hours and low hours contracts gain the right to a guaranteed hours offer reflecting the hours they regularly work over a 12 week reference period, plus reasonable notice of shifts and proportionate payment when shifts are cancelled at short notice. Agency workers are brought into the same regime, with obligations falling on both the agency and the end user. Employers who have used casual contracts and agency supply as their flexibility buffer should model what happens when that buffer carries a guaranteed hours obligation.
What does this mean in practice? A worked example
Take a UK employer hiring 200 frontline staff a year at an average salary of £26,000.
Under the pre 2027 rules, an underperforming hire identified at month nine could usually be exited without unfair dismissal exposure, since the two year qualifying period had not been met. From January 2027, the same hire has full unfair dismissal rights from month six. If 5% of those 200 hires prove unsuitable and are identified after month six, that is 10 people a year who now need a documented, defensible dismissal process with no statutory ceiling on the award if it goes wrong. Even if none of those cases reaches a tribunal, the HR time, management time and legal review involved in running each process properly is a real recurring cost.
Screening candidates properly before they enter the process costs a fraction of exiting them afterwards. If better upfront qualification takes that 5% mismatch rate down to 3%, the employer avoids four of those processes a year. In a market where dismissal is harder, budget moves from the top of the funnel to the qualification stage.
How should UK hiring teams respond?
Stop paying for volume you cannot use. Cost per application is now a misleading metric. If a channel delivers cheap applications that your team has to screen manually and some of which convert into six month unfair dismissal exposure, it is not cheap. Cost per qualified, interview ready candidate is the number that maps to the new risk profile.
Move screening in front of the application. Knockout questions, role requirements and availability checks applied before someone enters your ATS remove unsuitable candidates at the point where removing them costs nothing. Wonderkind's Qualify module runs mobile screening flows of this kind and reports five times higher completion than conventional application forms.
Make your probation period do real work. With a six month qualifying period from January 2027, probation is no longer a formality. Structured reviews at month one, month three and month five, documented against objective criteria, are what makes a decision defensible if it needs to be made.
Reduce dependence on agency supply where the guaranteed hours regime will bite. Agency and temp workers come into scope during 2027. If your flexibility model rests on them, model the cost of the guaranteed hours obligation before it arrives rather than after.
Fix your budget where you can. Performance based and fixed cost per qualified applicant models transfer volatility away from the employer. Wonderkind operates on a fixed cost per qualified applicant, delivering interview ready candidates to the ATS, and reports over 51% lower sourcing costs and candidate delivery in under 48 hours.
For a concrete example of what shifting spend from volume to qualification looks like, Newcross Healthcare moved away from job board reliance to performance oriented advertising and cut cost per application by 50%, increased inbound applications by 35% and saved 95% of the time previously spent on manual campaign tasks.
What is happening to UK recruitment costs in 2026 more broadly?
The Act is landing in a market that was already tight on cost and loose on candidates. According to the KPMG and REC UK Report on Jobs published in August 2026, based on a survey conducted between 9 and 27 July 2026:
Permanent placements stabilized in July, ending a 45 month downturn.
Temporary billings rose for a fourth consecutive month, with growth among the strongest seen in the past three years, and temporary vacancies increased for the first time in two years.
Starting salary inflation reached a six month high and temporary wage growth a 26 month high, though salary growth remains well below the long run trend.
Candidate availability continued to rise, driven by redundancies and limited job opportunities.
The combination matters for budgeting. Candidates are plentiful, so application volume is not the constraint. Employment cost and employment risk are rising, so the quality of who you let into the process is. That is close to the opposite of the conditions most UK recruitment budgets were built for.
Frequently asked questions
Does the Employment Rights Act give employees day one unfair dismissal rights?
No. The final position in the Act is a six month qualifying period from 1 January 2027, down from two years. Day one unfair dismissal rights were proposed at an earlier stage but are not what the Act implements.
When does statutory sick pay change?
From 6 April 2026, statutory sick pay is payable from the first day of illness and the lower earnings limit is removed, so lower paid workers previously excluded now qualify.
How much will the Employment Rights Act cost my business?
The government's impact assessment put the aggregate cost to business at up to £5 billion a year, and found the burden is proportionately higher for small and micro businesses. Your own exposure depends on headcount, absence rates, turnover in the first six months of employment, and how much of your workforce is on zero hours or agency contracts.
Should we stop hiring because of the Act?
37% of employers told the CIPD they plan to reduce permanent recruitment because of the reforms. That is a defensible response to higher exit costs, but it is not the only one. The alternative is to keep hiring volume and raise the accuracy of who you hire, which is where budget reallocated from application volume to upfront qualification does the most work.
Does the Act affect agency and temporary workers?
Yes. During 2027, agency workers are brought into the guaranteed hours and shift notice regime, with duties falling on both the agency and the end user.
When do tribunal time limits change?
From 1 October 2026, most employment tribunal claims move from a three month limitation period to six months, and from 9 November 2026 in Scotland.
This article is general information about the budgetary effect of employment law changes and is not legal advice. Confirm your specific obligations with a qualified employment law adviser.
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