Recruitment in focus: A challenging outlook for the sector

Like most industries, the recruitment sector has had to contend with a wide range of economic and geopolitical challenges over the past few years, placing financial pressure on recruitment agencies large and small. Unlike most industries, however, these challenges have been directly compounded by the performance and outlook of businesses spanning other sectors.

High inflation, political turbulence and widespread economic uncertainty since the Covid pandemic have had a lasting and material impact on business confidence across the UK. Naturally, the knock-on effect is that businesses’ investment and hiring decisions get shelved or put on hold.

According to official figures from the Office for National Statistics (ONS), the estimated number of vacancies in the UK stood at 816,000 in December 2024 to February 2025. Although up marginally compared to November 2024 to January 2025, the number of vacancies has fallen by more than 10% year-on-year. Prior to this latest three-month period, the total number of vacancies had declined for 31 consecutive quarters since March to May 2022. Meanwhile, in the year to February 2025, the UK’s rate of unemployment rose from 3.9% to 4.4%.

This trend is echoed in the Chartered Institute of Personnel and Development’s (CIPD) latest Labour Market Outlook. Its ‘net employment balance’, which measures the gap between employers expecting staff increases and those anticipating decreases in the next three months, fell to its lowest level amongst private sector businesses in over a decade, excluding the pandemic, in the last quarter. One in four employers (25%) also revealed they are planning redundancies in the next three months, which is also the highest level in a decade, outside the pandemic.

While these figures paint a worrying trend, perhaps of greater concern is what lies around the corner.

Budget pressures

Arguably the biggest announcement in last October’s Autumn Budget was the increase in employers’ National Insurance liabilities, which comes into effect in April. Not only are employer NICs increasing from 13.8% to 15%, the NIC-free allowance per employee is being reduced from £9,100 to £5,000. The full impact of this on businesses’ recruitment plans is yet to be felt, but will undoubtedly only further constrain job creation and wage growth.

A less-reported – but potentially just as impactful – announcement related to measures to combat what the government refers to as “widespread tax non-compliance” in the umbrella company market. Under the government’s proposals, from April 2026, the responsibility for accounting for PAYE and NICs would move from the umbrella company to the agency that contracts with the end client to supply the worker’s services.

This means that, should the umbrella company fail to operate PAYE/NICs correctly, liability for unpaid PAYE and NICs would move to the agency. Where there is no agency, this responsibility will fall to the end client.

If passed, the legislation would therefore place significant financial and compliance burdens on agencies, requiring them to conduct rigorous due diligence on umbrella partners, implement enhanced payroll compliance measures, and potentially absorb additional tax liabilities.

Not only might these changes affect demand for their services, they may also directly impact financial performance in the months and years ahead – at a time many recruitment companies are already feeling the strain.

FRP’s own analysis of UK recruitment businesses shows that the average credit score across the sector has fallen in the last year, from 41 to 39, indicating a decline in financial health. This has moved the average from a credit risk profile of ‘Normal’ to ‘Caution’*.

The progression of this legislation is therefore certainly something for recruitment companies to pay close attention to.

Opportunities ahead

Given the range of financial pressures on most sectors at present, a key opportunity for recruitment agencies is diversification. For some agencies, this will mean focusing more on temporary rather than permanent hiring, which is expected to become increasingly favoured by businesses mindful of the uncertain economic outlook.

For others, it may mean expanding internationally or into other sectors – whether to reduce exposure to the turbulent health of certain industries (for instance, the retail, leisure and hospitality sectors post-pandemic), or to target emerging and fast-growing sectors, such as artificial intelligence (AI) and Environmental, Social and Governance (ESG).

Indeed, the accelerating evolution and opportunity provided by AI and automation across all industries is just as relevant in the recruitment sector. By embracing such technologies and implementing them effectively, agencies can work smarter – particularly when it comes to identifying, screening, matching and even communicating with candidates. By automating more of the labour-intensive tasks, more time can be spent talking to candidates, helping to reduce many of the operating costs which have increased in recent years.

Yet this technology also presents a challenge, as clients wishing to reduce recruitment costs and move away from a reliance on agencies explore its potential. Keeping up with clients will therefore be just as important as keeping up with competitors over the coming years.

Opportunity also lies in the way recruitment firms manage their cash flow. Given the prevailing economic and financial turbulence, companies which prioritise their cash flow will stand the best chance of navigating the various challenges and pivoting to capitalise on opportunities as they arise. It is notable that our research found that the average credit score (49) of recruitment companies using invoice finance and asset based lending – which is so prevalent and suited to this sector – was much higher than the industry-wide average (39), as a result of their improved cash position.

The road ahead

Given the backdrop, strong financial budgeting, forecasting and management needs to be a key priority for recruitment companies during the months ahead. By staying close to the numbers, it will be easier not only to seize the opportunities which exist, but also to identify indicators of financial distress.

In these cases, it is always important to act quickly in order to understand the cause and tackle the issues contributing. By seeking expert advice as early as possible, whether from Debt Advisory, Financial Advisory or restructuring experts, it becomes much more straightforward to implement change and keep your business on track.

* Credit scores are an average of all recruitment companies with accounts filed since 1 January 2024, versus the previous year’s score. The score and credit risk profile are based on Vistra’s definitions and analysis of key data variables to predict the probability of a company becoming insolvent within the next 12 months. The score is out of 99; the lower the score, the higher the probability of the company becoming insolvent within the next 12 months.