Small and Medium Enterprises Failing to Capitalize on £2.7bn in National Insurance Benefits, according to a study by Howden
In the face of escalating costs, a powerful, underutilised tool—salary exchange—could be vital for UK Small and Medium Enterprises (SMEs) to manage their finances, boost employee benefits, and support economic expansion. However, a survey by Howden, a global insurance intermediary group, reveals that only 29% of SMEs are currently using this strategy, potentially missing out on £4.5 billion in National Insurance (NI) savings.
The survey, conducted in partnership with YouGov, polled 523 senior decision-makers in UK SMEs, highlighting the impact of recent fiscal demands on workforce decisions and employee benefits strategies. Salary exchange, or salary sacrifice, offers UK SMEs significant benefits, including substantial NI savings for both employer and employee, increased take-home pay, and higher pension contributions without extra cost.
By reducing an employee's gross salary in exchange for non-cash benefits like pension contributions, both parties pay less NI, making it a tax-efficient arrangement. Employees gain higher net pay or boosted pension contributions, while employers lower their NI liabilities, improving their cost base without reducing overall remuneration.
Despite these advantages, salary exchange remains underutilised by SMEs due to several reasons, such as lack of awareness, perceived administrative complexity, and organisational capacity constraints. Larger businesses, with their resources and specialist HR teams, are more likely to implement and manage salary exchange efficiently.
However, salary exchange setups can be straightforward and cost-neutral for employers, and flexible benefit offerings linked to salary exchange can enhance workforce satisfaction without excessive bureaucracy, a factor that SMEs can leverage given their agility.
In these challenging times, employers have a critical role in shaping the financial resilience of the UK workforce. Implementing salary exchange schemes could be one of the most immediate and impactful steps. With 28% of SMEs delaying pay increases and many employees facing financial strain, salary exchange offers a practical solution for reducing NI liabilities and boosting take-home pay or pension contributions.
Awareness of salary exchange is particularly low among Micro SMEs, with only 12% currently using it, and 30% unaware. This underscores the need for increased education and awareness about the benefits of salary exchange for SMEs.
The survey findings suggest that many businesses were eager to reward staff or adjust pay in line with inflation and cost-of-living pressures before the NI hike. However, with 32% of SMEs freezing hiring and 28% delaying planned salary increases, the impact on job creation and economic expansion could be significant.
In contrast, 39% of large SMEs are effectively using salary exchange. This disparity underscores the potential for SMEs to adopt this strategy to improve their financial position, attract and retain talent, and contribute to economic growth.
As pension reform looms, salary exchange could help employees save more for retirement while supporting long-term financial wellbeing. It's time for SMEs to consider this underused tool to navigate the current economic landscape and secure a brighter future for their businesses and employees.
[1] Howden Employee Benefits & Wellbeing (2021) Salary Exchange: A Missed Opportunity for UK SMEs. Available at: https://www.howdengroup.com/en-gb/insights/salary-exchange-a-missed-opportunity-for-uk-smes/ [2] The Pensions Regulator (2021) Salary sacrifice: a guide for employers. Available at: https://www.thepensionsregulator.gov.uk/employers/salary-sacrifice [3] HM Revenue & Customs (2021) Salary sacrifice. Available at: https://www.gov.uk/salary-sacrifice [4] ACAS (2021) Salary sacrifice. Available at: https://www.acas.org.uk/salary-sacrifice
- Personal-finance management is a critical concern for many UK Small and Medium Enterprises (SMEs), and salary exchange, a strategy that provides substantial National Insurance savings for both employer and employee, is an underutilised tool that could significantly improve their financial position.
- In the context of rising costs, increasing awareness and understanding of personal-finance tools like salary exchange is essential for SMEs, as they could potentially unlock £4.5 billion in National Insurance savings, boost workforce satisfaction, and contribute to economic growth.
