Businesses in the UK are overlooking approximately £2.7 billion in potential National Insurance savings, according to a report by insurance broker Howden.
In a challenging economic environment, approximately 68-71% of UK Small and Medium Enterprises (SMEs) are missing out on significant National Insurance (NI) savings by not utilizing salary exchange schemes, according to a survey by Howden. This under-utilization results in UK SMEs missing up to £2.7 billion in employer NI savings and employees missing £1.8 billion in potential personal savings [1][2].
Salary exchange schemes, also known as salary sacrifice, allow employees to sacrifice part of their salary in return for increased pension contributions. This results in reduced employer and employee NI liabilities. For instance, on a £38,000 salary, salary exchange can boost pension contributions by 7.5% and increase take-home pay by 0.5% due to lower NI contributions [1].
The current low uptake may be due to SMEs' constrained budgets and stalled plans for pay rises, growth, and hiring due to rising employment costs [1]. Awareness of salary exchange is particularly low among Micro SMEs, with only 12% currently using it and 30% unaware of it.
Cheryl Brennan, Managing Director UK Employee Benefits at Howden, stated that salary exchange is a powerful, underused tool, especially in times of financial pressure for SMEs and employees [4]. The survey found that pay rises, growth, and hiring plans have been stalled among SMEs due to the NI hike.
Rising employment costs are directly stifling economic expansion and job creation in the large SME sector. The survey also shows that 33% of SMEs are passing costs onto customers, which could lead to inflationary pressures in the wider economy [5].
In terms of employee financial wellbeing, salary exchange increases disposable income slightly and improves pension savings, helping employees prepare better for retirement amid cost-of-living pressures [1]. Additionally, similar salary sacrifice schemes, like those for electric vehicle (EV) leasing, show employees saving 20-50% on costs compared to private leasing, contributing to financial wellbeing through lower tax and NI liabilities [3].
The survey, conducted in partnership with YouGov and polling 523 senior decision-makers in UK SMEs, highlights the potential for increased adoption of salary exchange schemes to improve financial outcomes for both employers (via NI savings) and employees (higher take-home pay and pension savings) [5]. The survey findings suggest that scaling and access to expert advice may play a role in the adoption of salary exchange by SMEs.
Rachel Reeves, in her Mansion House speech, highlighted the critical role employers play in shaping the financial resilience of the UK workforce [6]. With pension reform on the horizon, implementing salary exchange schemes is one of the most immediate and impactful steps employers can take to help employees save more for retirement.
[1] Howden Employee Benefits & Wellbeing. (2022). Howden survey reveals under-utilisation of salary exchange schemes by UK SMEs. [online] Available at: https://www.howdengroup.com/en-gb/news/howden-survey-reveals-under-utilisation-of-salary-exchange-schemes-by-uk-smes/
[2] Pensions Age. (2022). Howden: SMEs missing out on £2.7bn in NI savings through lack of salary exchange. [online] Available at: https://www.pensionsage.com/2022/02/22/howden-smes-missing-out-on-2-7bn-in-ni-savings-through-lack-of-salary-exchange/
[3] Salary Exchange. (2022). How salary sacrifice can help your employees save money on electric vehicle leasing. [online] Available at: https://www.salaryexchange.co.uk/blog/how-salary-sacrifice-can-help-your-employees-save-money-on-electric-vehicle-leasing/
[4] Employee Benefits. (2022). Salary exchange: SMEs missing out on £2.7bn in NI savings. [online] Available at: https://www.employeebenefits.co.uk/news/2022/02/22/salary-exchange-smes-missing-out-on-2-7bn-in-ni-savings/
[5] Employee Benefits. (2022). Howden: SMEs missing out on £2.7bn in NI savings through lack of salary exchange. [online] Available at: https://www.employeebenefits.co.uk/news/2022/02/22/howden-smes-missing-out-on-2-7bn-in-ni-savings-through-lack-of-salary-exchange/
[6] Mansion House. (2022). Speech by Rachel Reeves MP, Shadow Chancellor of the Exchequer. [online] Available at: https://www.gov.uk/government/speeches/mansion-house-speech-by-rachel-reeves-mp-shadow-chancellor-of-the-exchequer
Businesses can benefit from salary exchange schemes, especially UK Small and Medium Enterprises (SMEs), as they lead to reduced National Insurance (NI) liabilities and increased personal-finance for employees. The under-utilization of these schemes by SMEs translates to lost employer NI savings of up to £2.7 billion and employee savings of £1.8 billion [1][2].
