Labour watering down its sweeping overhaul of workers’ rights is expected to slash the cost of the plan for UK businesses by billions of pounds, the government’s own analysis shows.

According to an updated Whitehall impact assessment published on Wednesday, concessions by ministers could reduce the cost of the employment rights bill for businesses to about £1bn.

An earlier version of the document had suggested the package, which includes day-one employment rights and banning zero-hours contracts, could have cost firms up to £5bn.

In its revised analysis, the government said the new lower estimate reflected a decision to phase in the changes over several years, as well as “the fact that policy design and evidence have developed” since its last assessment, in October 2024.

Labour’s employment rights bill finally became law last month after a lengthy legislative battle in the House of Lords, amid fierce business lobbying and after the government made a last-minute U-turn on an important element of the plan.

In a direct breach of Labour’s manifesto, prompting anger among backbench MPs, ministers abandoned their plan to give workers day-one rights to claim for unfair dismissal, instead proposing a six-month threshold.

The concession, which aimed to break the parliamentary deadlock to ensure the progress of other important legislative upgrades to employment rights, came after a deal between six of the UK’s biggest business groups and trade unions. However, some union leaders, including the Unite general secretary, Sharon Graham, said the bill was now a “shell of its former self”.

Meanwhile, some business leaders and the Conservatives complained the legislation still carried unacceptable costs for businesses at a time of tax increases, a weak economic outlook, and rising unemployment.

Publishing its updated assessment, the government acknowledged businesses would be paying more – including for sweeping changes to sick pay, paternity leave and on administrative costs.

However, it argued the additional costs would “represent no more than a modest increase” for employers and the benefits would outweigh the short-term cost.

“To contextualise the size of this impact, total employment costs in the UK were £1.4tn in nominal terms in 2024. This means the estimated increase represents around 0.1% of the UK’s total pay bill, rising to less than 0.4% if we use [the] previous upper-bound scenario,” the assessment said.

The analysis showed a revised 18 million workers could benefit from the strengthened package of rights, up from a previous estimate of about 15 million. It said those who are lowest paid, in sectors including social care, hospitality and retail, would benefit most.

The report also found the bill would help boost employment by about 0.1%, while raising job quality, productivity and creating fairer competition between companies. Together, it said the changes could have a “small, positive direct impact” on UK economic growth.

A government source said: “This law will transform the experience of millions of workers – particularly younger people and women. As this analysis shows, the benefits of these changes outweigh the costs and will be felt by workers across the country.”