By Cheryl Brennan
UK SMEs are missing out on £2.7 billion in potential National Insurance savings by overlooking salary exchange schemes, new Howden research reveals. With rising costs and wage pressures, this article focuses on how this tax-efficient approach can boost pensions, increase take-home pay, and free funds for growth, without adding to employer costs.
Small and medium-sized enterprises (SMEs) in the UK face increasing financial pressures[i]. Rising employment costs, tight labour markets, and slowing economic growth are forcing many businesses to rethink how they attract, retain, and reward staff. As a result SME’s are often seeking new ways to make limited resources stretch further.
In the UK, new research by Howden Employee Benefits[ii], conducted in partnership with YouGov, highlights a major financial opportunity that is being missed. Despite salary exchange being a well-established and tax efficient strategy, 68%* of UK SMEs are not utilising it, potentially missing out on an estimated £2.7 billion in employer National Insurance (NI) savings and £1.8 billion in employee savings.
Salary exchange (also called salary sacrifice) allows employees to exchange a portion of their gross salary for non-cash benefits, most commonly pension contributions. By reducing the employee’s salary, both employer and employee pay less National Insurance. These savings can then be reinvested into pension contributions or increase net take-home pay.
For example, on a salary of £38,000, salary exchange can boost pension contributions by 7.5% and increase take-home pay by 0.5%, without raising total employer costs. This means employees can save more for retirement while enjoying slightly higher take-home pay, all at no extra cost to their employer.
Despite these advantages, only 29% of UK SMEs currently use salary exchange. The research suggests that lack of awareness and guidance is a key barrier. Over a third (36%) of SME leaders know about salary exchange but haven’t explored it fully, and 17% are unaware it exists. Among micro SMEs (those with fewer than 10 employees), adoption is especially low, just 12% use it, and 30% are completely unfamiliar with the scheme.
Rising costs and stalled growth
The April 2025 increase in employer NI contributions in the UK has forced many SMEs to revise workforce and investment plans. Prior to the increase, 37% of SMEs intended to raise employee salaries, but many have since delayed or abandoned these plans. Similarly, 31% had aimed to invest in business growth, and 23% planned to expand their teams. These initiatives are being deprioritised as cost containment takes precedence.
One-third of SMEs have responded by passing costs onto customers, risking further inflationary pressures. Others have frozen hiring or postponed pay rises. While these defensive actions may protect short-term margins, they risk damaging employee morale and undermining long-term productivity.
Salary exchange offers a constructive alternative. It allows SMEs to enhance employee reward packages and improve financial wellbeing without additional employer costs. This is especially valuable in sectors facing retention challenges and in regions where wage growth is stagnant despite rising living costs.
Aligning with public policy and long-term goals
Salary exchange also aligns with broader government objectives in the UK. As pension reform advances, policymakers focus increasingly on boosting financial resilience and long-term savings. The UK government has emphasised the importance of employer engagement to tackle pension under-saving and improve financial literacy.
By adopting salary exchange, SMEs can support these goals while helping staff manage cost-of-living pressures. Higher pension contributions and increased take-home pay can make a meaningful difference, particularly in lower-wage sectors. For employers, NI savings can be reinvested into business growth, staff development, or enhanced benefits.
The research finds larger SMEs are more likely to use salary exchange: 39% of firms with over 50 employees adopt it, compared to only 12% of micro businesses. This suggests scale, HR expertise, and access to advice play crucial roles in uptake.
Practical steps for SMEs to introduce salary exchange
Implementing salary exchange can be straightforward with the right support. Key steps include:
- Evaluating the opportunity: Analyse current payroll and pension contributions to estimate potential savings.
- Communicating clearly: Educate employees using accessible, jargon-free language.
- Ensuring compliance: Align the scheme with tax regulations and auto-enrolment rules.
- Reinvesting the savings: Use NI savings to reinvest into employees’ pension pots, or enhance employee support, such as financial wellbeing programmes.
Salary exchange isn’t just for large firms. With minimal disruption and potential cost-neutrality, it offers SMEs a practical way to enhance employee outcomes and strengthen financial resilience
A strategic win in a challenging environment
Economic headwinds for SMEs show little sign of easing. Rising costs, competitive labour markets, and pension and tax policy changes will continue to shape business strategy. In this context, salary exchange provides a smart, efficient path to greater value for both employers and employees.
By restructuring remuneration rather than simply increasing pay, SMEs can improve their financial position, boost employee loyalty, and better prepare for the future. This overlooked opportunity is a strategic win that SMEs can no longer afford to ignore.
* Figures calculated excluding Don’t know: Howden analysed the results of a proprietary survey of 523 employee benefits decision makers from Micro, small and medium sized businesses in the UK to better understand their responses to national insurance increases. YouGov conducted the survey from 28 April to 7 May 2025. The survey was carried out online. The figures have been weighted and are representative of British business size and region.
Cheryl Brennan
