Research*, conducted in partnership with YouGov, reveals that 68% (1) of UK SMEs are not using salary exchange to boost pension contributions and after-tax pay – missing out on a potential £2.7 billion in employer National Insurance (NI) savings and £1.8 billion in employee savings.
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. The survey, which polled 523 senior decision-makers in UK SMEs, found that:
Pay rises, growth, and hiring plans have been stalled.
Prior to the NI hike, 37% of SMEs indicated they would have prioritised increasing employee salaries. This suggests that many businesses were eager to reward staff or adjust pay in line with inflation and cost-of-living pressures. Similarly, 31% of SMEs had planned to invest in business growth, and 23% intended to expand their workforce – both of which are now being deprioritised. This shift highlights how rising employment costs are directly stifling economic expansion and job creation in the large SME sector.
SMEs are taking defensive actions to manage rising costs.
In response to the NI increase, 33% of SMEs are passing costs onto customers, which could lead to inflationary pressures in the wider economy. Meanwhile, 32% are freezing hiring, and 28% are delaying planned salary increases. These actions reflect a cautious, cost-containment mindset among SME leaders, who are trying to preserve margins in a challenging economic environment.
Salary exchange remains underutilised despite its benefits.
Only 29% of SMEs currently use salary exchange (also known as salary sacrifice) for pensions, despite its potential to deliver valuable savings at a time of critical economic pressures. This means that 68% (1) of SMEs – and their employees – are missing out on a combined £4.5 billion in potential National Insurance savings. For employers, this represents a missed opportunity to reinvest in their workforce or business operations. For employees, it means reduced take-home pay and lower pension contributions at a time when many are feeling the pinch and under-saving for retirement.
Awareness and understanding of salary exchange is low.
The research reveals a significant knowledge gap: 36% of SMEs are aware of salary exchange but have not explored it in detail, and 17% are not aware of it at all. This lack of awareness is particularly pronounced among Micro SMEs (organisations with less than 10 employees), where only 12% currently use salary exchange and 30% are entirely unaware of it. In contrast, 39% of large SMEs are using salary exchange effectively, suggesting that scale and access to expert advice play a role in adoption.
As highlighted in Rachel Reeves’ Mansion House speech, employers have a critical role to play in shaping the financial resilience of the UK workforce. With pension reform on the horizon, one of the most immediate and impactful steps employers can take is to implement salary exchange schemes – helping employees save more for retirement while supporting long-term financial wellbeing.
Cheryl Brennan, Managing Director UK Employee Benefits, Howden, said: “At a time when SMEs are under immense financial pressure and employees are struggling with the cost of living, salary exchange is a powerful, underused tool. Our research shows the majority of SMEs are missing out on significant savings that could be reinvested into their people and growth.”
With 28% of SMEs delaying pay increases and many employees facing financial strain, salary exchange offers a practical solution. By implementing this salary exchange, employers can reduce their NI liabilities while simultaneously boosting employees’ take-home pay or pension contributions.
*Howden Research
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.
