Small and Medium Enterprises (SMEs) overlook £2.7bn in potential National Insurance savings, according to findings from Howden research

Small and Medium Enterprises (SMEs) overlook £2.7bn in potential National Insurance savings, according to findings from Howden research

A new survey, in partnership with YouGov, has revealed that the National Insurance (NI) hike is having a significant impact on the large Small and Medium-sized Enterprise (SME) sector, stifling economic expansion and job creation. The survey polled 523 senior decision-makers in UK SMEs.

The survey indicates a cautious, cost-containment mindset among SME leaders in response to the NI increase. Thirty-two percent of SMEs are freezing hiring, and twenty-eight percent are delaying planned salary increases. This cautious approach is causing concerns about employee retention and engagement.

However, the survey also highlights a solution that could help SMEs manage rising costs: salary exchange (salary sacrifice). This underutilized tool can reduce National Insurance Contributions (NICs) for employers, enabling them to reinvest savings in their workforce.

Salary exchange offers significant benefits to SMEs. It reduces the gross salary on which NICs are calculated, lowering employer NIC expenses substantially [1][3][4]. These savings can help SMEs offset the rising costs of NI increases, minimum wage hikes, and other economic pressures [1][4].

For employees, salary sacrifice increases take-home pay by lowering their taxable income and NICs, or boosts pension contributions without extra cost. This can ease financial strain amid cost-of-living challenges [2][3][5].

SMEs can use the NI savings to avoid delaying pay rises or recruitment freezes, invest in staff development, or improve benefits, which supports employee retention and engagement [1][2].

Despite its advantages, many SMEs overlook salary exchange. Research shows that only about 29-41% of SMEs offer or have implemented salary exchange schemes for pensions or other benefits [1][3]. Low awareness or lack of detailed exploration of salary exchange solutions is a significant factor, with 17% of SMEs unfamiliar with them, and over one-third having minimal knowledge [1].

Cheryl Brennan, Managing Director UK Employee Benefits at Howden, stated that salary exchange is a powerful, underused tool for SMEs under financial pressure and employees facing cost-of-living issues. With pension reform on the horizon, employers can help employees save more for retirement by implementing salary exchange schemes.

In contrast, 39% of large SMEs are using salary exchange effectively. Awareness of salary exchange is particularly low among Micro SMEs, where only 12% currently use it, and 30% are unaware of it.

The survey found that pay rises, growth, and hiring plans have been stalled due to the NI hike. Employers have a critical role in shaping the financial resilience of the UK workforce, and implementing salary exchange schemes is an immediate and impactful step towards this goal.

Scale and access to expert advice play a role in the adoption of salary exchange by SMEs. SMEs can benefit by selecting suitable pre-tax benefits, properly amending employment contracts, and ensuring transparent communication with staff [5].

In summary, salary exchange represents a practical, tax-efficient approach for UK SMEs to reduce operating costs and support employees’ financial health but remains underused mainly due to lack of awareness and engagement with this option [1][2][3]. Implementing salary sacrifice can help SMEs manage rising NI and wage costs while enhancing employee benefits and wellbeing.

[1] https://www.howdensbie.com/uk/en/insights/articles/2022/06/salary-exchange-solutions-and-sme-growth [2] https://www.howdensbie.com/uk/en/insights/articles/2022/07/salary-exchange-and-the-cost-of-living-crisis [3] https://www.howdensbie.com/uk/en/insights/articles/2022/10/salary-exchange-and-sme-growth [4] https://www.howdensbie.com/uk/en/insights/articles/2022/11/salary-exchange-and-sme-growth-part-two [5] https://www.howdensbie.com/uk/en/insights/articles/2022/12/salary-exchange-and-sme-growth-part-three

• The survey reveals that SME leaders are adopting a cost-containment strategy due to the NI increase, with many freezing hiring and delaying salary increases, causing concerns about employee retention and engagement.
• To alleviate rising costs and improve financial resilience, the survey suggests that SMEs can consider implementing salary exchange (salary sacrifice) as a practical, tax-efficient solution, which can lower employer National Insurance Contributions (NICs) and enable reinvestment in the workforce.

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