Rising costs & AI adoption put SME graduate hiring at risk

The UK's professional jobs market faces a combination of rising employment costs, limited government incentives and the rapid adoption of artificial intelligence (AI), creating significant challenges for graduate hiring among small and medium-sized businesses.

Hiring costs

Many small businesses are reconsidering graduate recruitment due to the financial and operational risks. According to Angelica Solutions, hiring a graduate into a technical or analytical role such as actuarial, pricing or data science often starts at GBP £28,000 in salary. Employers must also account for a further 20% in National Insurance and pension contributions. Added to this are the costs of training and supervision, which are significant in the graduate's first year.

Sarah Vaughan, Founder & Director of Angelica Solutions, said: "Hiring a graduate into a professional role costs a small business nearly £40,000 in the first year, before they contribute meaningfully to the bottom line, that is if they even stay long enough for that. Government apprenticeship funding barely touches the sides, and SMEs are left carrying the full financial and operational risk. If we want to grow high value industries and get young people into skilled work, the next Budget must offer real incentives."

Budget challenges

The company argues that government support for small firms hiring graduates is inadequate. In addition to rising base salary and employment taxes, funding available through apprenticeship schemes is limited, leaving small companies to bear the brunt of graduate recruitment costs.

Vaughan said: "In year one, graduates are an overhead, not an asset. By year two, they might just about break even. By year three, they finally become real contributors, if they stay that long."

AI substitution

Emerging trends in automation and AI are also impacting the decision to offer entry-level roles. Increasingly advanced AI tools can now perform much of the analytical work previously assigned to new graduates. This increased capability is changing the business case for graduate hiring.

"The overhead and retention risks are colliding with advances in automation, as right now, it's cheaper to automate than to upskill and that's not a sustainable path forward. Employers are making tough choices: take a £40,000 hit on a graduate or deploy AI tools that can perform 60-70% of the work immediately. It's easy to see why many small firms are choosing the latter," said Vaughan.

Retention pressures

Graduate retention has become an additional concern for employers. High turnover undermines the returns on investing in training and skills development, leading to further reluctance in hiring new entrants to the workforce.

Vaughan described how, despite these pressures, Angelica Solutions continues to invest in graduate development. She highlighted the example of Alistair Stark, who joined as a graduate in 2022 and was recently promoted to Senior Analytics Consultant, playing a significant role in key analytics projects for the firm.

Policy proposals

Angelica Solutions is calling for policy measures to support graduate hiring among SMEs. Suggestions include targeted corporation tax relief for firms that invest in and train entry-level professionals. Such a policy, it argues, would encourage sustainable growth and ensure the business sector continues to develop a skilled workforce.

"The Government really needs to investigate targeted corporation tax relief for SMEs that invest in and train entry level professionals as a practical, growth focused policy that rewards firms investing in people, not just technology. This isn't about promoting inefficiency, but if we don't train new job seekers now, we won't have business leaders in the future," said Vaughan.