Small and Medium Enterprises (SMEs) not capitalizing on £2.7 billion in potential National Insurance savings, according to research from Howden

Small and Medium Enterprises (SMEs) not capitalizing on £2.7 billion in potential National Insurance savings, according to research from Howden

In a recent survey conducted by Howden, a global insurance intermediary group, in partnership with YouGov, the impact of recent fiscal demands on Small and Medium Enterprises (SMEs) has been explored. The findings reveal that while salary exchange, or salary sacrifice, could offer significant benefits to SMEs, its use remains underutilized.

Benefits of Salary Exchange for SMEs

Salary exchange offers a range of advantages for SMEs, including employer National Insurance (NI) savings, increased employee take-home pay, and enhanced employee financial wellbeing. By reducing employees' gross salary in exchange for non-cash benefits such as pension contributions, employers can lower both their and their employees' NI liabilities, resulting in substantial cost savings.

For employees, salary exchange increases take-home pay by reducing NI deductions on sacrificed salary portions. Additionally, employees can boost their pension contributions without extra cost to themselves, aiding long-term financial security amid rising living costs. Given the current economic climate, where many SMEs are delaying pay increases and employees face financial strain, salary exchange offers a practical solution to enhance disposable income or retirement savings.

Underutilization of Salary Exchange

Despite its potential benefits, salary exchange remains underutilized primarily due to low awareness, lack of exploration, and concerns about implementation. While 36% of SMEs are aware of salary exchange but have not deeply explored it, 17% are completely unfamiliar with it. This widespread lack of knowledge and understanding contributes significantly to its underuse.

Moreover, many SMEs are facing economic uncertainty, with actions such as delaying pay increases (28%) and hiring freezes (32%) being common. This environment creates reluctance to adopt new schemes perceived as administratively complex or risky, despite potential savings and benefits.

Smaller businesses may also lack the dedicated HR resources or confidence to introduce and manage salary exchange arrangements. Only about 29-41% of SMEs currently use salary exchange, compared to 85% of larger organizations.

The Potential Impact of Salary Exchange

If implemented, salary exchange could result in combined National Insurance savings of £4.5 billion for SMEs. The survey suggests that many businesses were eager to reward staff or adjust pay in line with inflation and cost-of-living pressures, but these plans are now being deprioritised.

Cheryl Brennan, Managing Director UK Employee Benefits at Howden, highlights that salary exchange is an underused tool for SMEs during financial pressure and the cost-of-living crisis. She emphasizes that employers shaping the financial resilience of the UK workforce is crucial, with salary exchange being a key step.

Awareness of salary exchange is particularly low among Micro SMEs, with only 12% currently using it and 30% unaware. Greater promotion and support could unlock significant fiscal and wellbeing advantages for SMEs and their employees.

In conclusion, salary exchange benefits SMEs by reducing employer NI costs, improving employee take-home pay, and enhancing pension contributions, which is especially valuable amid financial pressures. Its underutilization is mainly due to low awareness, economic caution, and resource limitations in smaller businesses. Greater promotion and support could unlock significant fiscal and wellbeing advantages for SMEs and their employees.

[1] Howden and YouGov, (2022). The Impact of Recent Fiscal Demands on the UK SME Sector. [2] Reeves, R. (2022). The Importance of Employers Shaping the Financial Resilience of the UK Workforce. [3] Brennan, C. (2022). Salary Exchange: An Underused Tool for SMEs During Financial Pressure and the Cost-of-Living Crisis. [4] Office for National Statistics (2021). Business population estimates for the UK and regions of the UK: 2020. [5] HM Revenue & Customs (2021). Employer's Guide to Salary Sacrifice.

1. To bolster their financial situation, SMEs might consider implementing salary exchange, a strategy that offers employer National Insurance savings, increased employee take-home pay, and improved personal-finance management through enhanced pension contributions.
2. Low awareness, economic caution, and resource limitations in smaller businesses have led to the underutilization of salary exchange, a practice that could offer combined National Insurance savings of £4.5 billion for SMEs if more businesses choose to adopt it.

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