Start-ups in Britain turn to AI instead of costly new hires

LONDON – British entrepreneurship appears to be on the rise, with tens of thousands of new businesses popping up. The problem, for workers, is that these start-ups are increasingly using artificial intelligence and freelancers instead of taking on permanent staff.

New firms launched in Britain in 2025 generated an average of 2.7 jobs each, around one fewer than when records began in 2017, according to a Bloomberg analysis of official data. Total employment created by new enterprises fell 16 per cent to the lowest level on record.

That is despite Britons starting new firms at the fastest pace in two years during the fourth quarter.

“It’s scary to hire people, the minimum wage is so high and there are so many additional protections,” said Ms Rachael Twumasi-Corson, an entrepreneur from London who’s set to launch a new company later in 2026.

“I would much rather have a team, celebrate wins and figure out ways to solve problems together, but at the moment my team is ChatGPT and Gemini.”

Business groups say Britain’s Labour government has made it more risky and expensive to hire permanent staff, despite the left-leaning party promising to prioritise economic growth.

Chancellor of the Exchequer Rachel Reeves hiked national insurance, a key payroll tax, in 2025 – and while small businesses are largely exempt, they face higher costs from rising salaries, including sharp increases in the minimum wage. 

Entrepreneurs are also concerned about new employment laws, which allow workers to claim unfair dismissal after six months on the job instead of the current two years, effectively making it harder to fire staff. The proposals will also give workers sick pay rights from day one.

AI technology means that some founders can avoid hiring in the first place.

Ms Twumasi-Corson initially wanted to employ a designer and a social media marketing specialist – she even wrote the job descriptions – but ended up relying on contractors and AI chatbots because of the costs.

The London Living Wage, an optional rate the entrepreneur cited as a benchmark, has reached £14.80 (S$25) per hour in 2025 to 2026, a 36 per cent increase over the last five years.

That approach is common among new start-ups, according to Mr Timothy Barnes, chief executive at the Centre for Entrepreneurs.

Founders are starting out with just a small team of specialists while using AI to reduce the number of people needed to support each specialist, particularly in roles like business development, accounting or marketing.

There is also less appetite for human coders in new tech businesses as AI fills the gap. 

“Before, the mindset might have been: we’ve got this idea and we’re going to quickly recruit as many people as possible to pursue it,” said Mr Eamonn Ives, research director at the Entrepreneurs Network.

“Now start-ups are thinking twice about taking on new hires who they might not be able to keep on if things don’t pan out.”

One in four founders have made fewer administrative hires, and 19 per cent recruited fewer juniors in response to AI technological advancements, according to a survey conducted by the Entrepreneurs Network in November 2025. Only 2 per cent said they increased headcount.

Labour’s Employment Rights Act includes stricter rules on unfair dismissal, the biggest worry for start-ups. A large company can deal with one bad hire in a way that a new company with five employees cannot.

“When I started my first company, as an 18-year-old in university halls, my first thought wasn’t, ‘well, how do I make sure I can provide maternity pay and sick pay’ – and I’m speaking as a mum of four,” said Ms Twumasi-Corson, who launched her first venture with two employees.

“You simply cannot treat a start-up the same way that you treat a large corporation, and I think that’s the biggest mistake of the Employment Rights Bill.”

Mr David Bharier, head of research at the British Chambers of Commerce, said “newer firms are starting out leaner, more automated and less labour-intensive”.

It is an early sign that the natural rate of unemployment, known as NAIRU – the point at which the labour market no longer bears on inflation – may be edging up.

The Bank of England is keeping a close eye on structural changes in the labour market, with chief economist Huw Pill warning of a rise in NAIRU. Unemployment across the British economy is close to a five-year high.

Labour’s tougher employment laws and tax hikes risk losing the votes of entrepreneurs.

In June 2025, it was among the top parties backed by founders, within touching distance of the Liberal Democrats on about 17 per cent. By November 2025, support for Labour had fallen to 10 per cent, placing it near the bottom of the list – above only the more left-wing Greens.

Support for Mr Nigel Farage’s populist Reform party increased the most, climbing four points to 15 per cent over that period.

“I’ve been a Labour voter in the past and now I’m on the fence,” Ms Twumasi-Corson said. “They seem out of touch with business.” BLOOMBERG