Small and Medium-Sized Enterprises (SMEs) Overlook £2.7 Billion in Potential National Insurance Savings, According to Findings by Howden

Small and Medium-Sized Enterprises (SMEs) Overlook £2.7 Billion in Potential National Insurance Savings, According to Findings by Howden

In a recent survey conducted by global insurance intermediary group Howden, it was revealed that a significant number of UK Small and Medium Enterprises (SMEs) are not utilizing salary exchange to boost pension contributions and after-tax pay. The survey polled 523 senior decision-makers in UK SMEs and highlighted a cautious, cost-containment mindset among these leaders in response to the National Insurance (NI) increase.

The survey findings suggest that pay rises, growth, and hiring plans have been stalled for many SMEs due to the NI hike. With 28% of SMEs delaying pay increases and many employees facing financial strain, salary exchange offers a practical solution for reducing NI liabilities while boosting take-home pay or pension contributions.

Implementing salary exchange schemes could be one of the most immediate and impactful steps employers can take in relation to pension reform. On an illustrative salary of £38,000, salary exchange can boost pension contributions by 7.5% and take-home pay by 0.5% funded via lower NI.

However, the survey also revealed that scale and access to expert advice seem to play a role in the adoption of salary exchange. Awareness of salary exchange is particularly low among Micro SMEs, with only 12% currently using it and 30% unaware. Large SMEs are more likely to use salary exchange, with 39% currently doing so.

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 issues. She highlights that this approach can make compensation packages more cost-effective and competitive, helping SMEs attract and retain talent by linking benefit offerings to financial and tax efficiencies.

Rachel Reeves' Mansion House speech emphasized the critical role employers play in shaping the financial resilience of the UK workforce. With the potential employer National Insurance (NI) savings from salary exchange amounting to £2.7 billion, while employee savings could reach £1.8 billion, it is clear that this strategy could play a significant role in improving the financial health of both employers and employees.

However, the underutilization of salary exchange in SMEs may be due to administrative hurdles, compliance concerns, and limited awareness. The complexity and administrative burden, minimum wage and contribution caps, and potential immediate cash flow disadvantages are factors that may deter SMEs from adopting this strategy.

To ensure the successful implementation of salary exchange, SMEs must weigh these advantages against administrative capacity and ensure transparency to maintain employee trust and avoid confusion. When well designed, salary exchange can improve workforce retention and financial efficiency in employee benefits strategies.

The survey, conducted in partnership with YouGov, suggests that rising employment costs are directly stifling economic expansion and job creation in the large SME sector. As such, it is crucial for SMEs to explore the benefits of salary exchange and consider it as a strategic tool for managing costs and enhancing employee benefits.

1. Despite many SMEs delaying pay increases due to the NI hike, salary exchange presents a practical solution for reducing National Insurance liabilities while boosting take-home pay or personal-finance contributions.
2. The underutilization of salary exchange in SMEs may be due to various factors, such as administrative hurdles, compliance concerns, and limited awareness, which could pose challenges for improving personal-finance and business efficiency.

Read also: