How Are Rising Employment Costs Creating A New Market For AI Startups?

Businesses are taking another look at employment costs after the ONS found that 66% of businesses with 10 or more employees reported higher staffing costs during the previous three months. These costs would cover things like wages, bonuses, Nationa nsurance contrubutions and pension funds.

The ONS also found that 54% of businesses reported higher hourly wages in April this year than in March. Meanwhile, 23% said they would respond to future employment cost increases by reducing employee numbers.

A lot of business owners are also starting to take another look at plans for retirement and expansion, as well as the everyday spending decisons. It can become harder to make decisions froma. hiring perspective when wage bills and pension contributions, etc. go up within a short space of time.

Jules Robertson, co-founder of Tally Workspace, said, “This morning’s ONS figures reinforce what many SME leaders have been feeling for some time – the cost of employing people has risen significantly, and that inevitably affects hiring decisions.”

She added, “When two-thirds of businesses are reporting higher staffing costs, it’s not just a line on a balance sheet. For smaller businesses in particular, rising wages, National Insurance contributions and pension costs can have a direct impact on growth plans, recruitment and investment decisions.”

This creates new commercial opportunities for companies and startups selling AI software…

Could AI Companies Benefit From Higher Staffing Costs?

The ONS survey did not ask businesses about AI but the findings do, hoewever explain why AI startups may be finding a gap in the market.

Many AI startups sell software that handles admin and support work, and the software is often marketed as a way for smaller teams to get work done efficiently without needing more staff.

This becomes relevant when employers are not as willing to expand their workforce and this can be seen with the rise in lean startups built around automated systems. Robertson said, “Most SMEs aren’t looking to stand still. They want to grow, hire and invest in their teams. But when employment costs rise sharply, businesses naturally become more cautious about taking on additional headcount, particularly in entry-level roles where the return on investment may take longer to realise.”

Businesses who are trying to hold back on recruiting, spending money on software might sound like a better alternative than commiting to the long term cost of new employees. Now, this doesn’t necessarily mean companies are replacing workers with AI, but what it does mean is that software vendors are entering discussions that previously were based on recruitment.

The ONS found that 44% of businesses said they would respond to future employment cost rises by just increasing prices and 38% said they would absorb those costs within profit margins and it looks like tech spending could be the alternative they go for.

Is A New Customer Base Emerging For AI Startups?

Again, in an environment where these costs are going up, tech companies selling productivity software may find more customers willing to consider new tools.

Robertson said, “SMEs remain incredibly resilient, but growth depends on confidence. If businesses are expected to play a bigger role in tackling youth unemployment and building future talent pipelines, they need an environment that makes hiring feel achievable rather than increasingly costly.”

She concluded, “The conversation shouldn’t just be about creating jobs. It should also be about creating the conditions that give businesses the confidence to offer them.”

And it’s not that AI is replacing work – what the latest ONS data does show is that employers are reassessing spending decisions as staffing costs increase. That environment could create favourable conditions for AI startups selling software designed to help businesses achieve more with existing teams.