Small and medium-sized businesses forego £2.7 billion in National Insurance savings, according to findings by Howden
A new survey reveals that a significant number of Small and Medium-sized Enterprises (SMEs) in the UK are not taking advantage of salary exchange for pension contributions, missing out on substantial savings and employee benefit advantages.
The survey, conducted by global insurance intermediary group Howden in partnership with YouGov, found that only 29% of SMEs are currently using salary exchange schemes, leaving 68% of SMEs not utilizing this potential cost-saving measure.
Reasons for Low Uptake
The survey highlights several key reasons for the low uptake of salary exchange, including limited awareness, cost pressures, and shifting business priorities caused by recent National Insurance (NI) increases.
One of the main reasons for the low implementation and awareness is that many SMEs overlook salary exchange despite its potential to boost pension contributions by around 7.5% and increase employee take-home pay by 0.5%, funded through NI savings.
Recent NI hikes have caused SMEs to reprioritize spending, with 32% of SMEs freezing hiring, and 28% delaying planned salary increases in response to higher employment costs. This has limited the adoption of salary exchange schemes despite their cost-saving potential.
Some SMEs may find salary exchange arrangements administratively challenging or uncertain about how to implement them effectively, contributing to the low adoption rate.
Consequences of Not Adopting Salary Exchange
The underutilization of salary exchange by SMEs has several potential consequences. SMEs forego approximately £2.7 billion in employer NI savings and £1.8 billion in employee savings collectively, weakening their ability to fund competitive employee benefits and manage labor costs efficiently.
Without salary exchange, SMEs might struggle to increase pension contributions, as employees increasingly desire enhanced pension schemes and greater financial security, which influences talent attraction and retention.
Higher employment costs without leveraging salary exchange have contributed to SMEs delaying pay rises, workforce growth, and business investment, which in turn slows overall economic growth and job creation in this critical sector.
Some SMEs are absorbing NI increases directly or reshaping employee benefits (e.g., introducing other tax-efficient perks), indicating a need to optimize compensation strategies to maintain employee value while controlling costs.
The Role of Salary Exchange in Addressing Financial Strain
Cheryl Brennan, Managing Director UK Employee Benefits at Howden, emphasizes that salary exchange is a powerful, underused tool for SMEs under financial pressure and employees facing cost-of-living struggles.
Salary exchange offers a practical solution for SMEs, allowing them to reduce their NI liabilities while boosting employees' take-home pay or pension contributions. If salary exchange were used on an illustrative salary of £38,000, pension contributions could be boosted by 7.5% and take-home pay by 0.5%.
In conclusion, the underutilization of salary exchange by many UK SMEs results largely from cost pressures and awareness gaps, limiting their ability to offer enhanced employee pensions and contributing to constrained workforce growth and economic expansion. Employers have a critical role in shaping the financial resilience of the UK workforce, and implementing salary exchange schemes can help.
- Despite its potential to enhance personal-finance situations by up to 8.0%, many SMEs are not adopting salary exchange schemes, missing out on approximately £4.5 billion in collective savings.
- With salary exchange, SMEs can optimize their business-finance by reducing National Insurance liabilities and increasing employees' take-home pay or pension contributions, thereby providing a practical solution to cope with financial strain.