BUSINESS owners are being urged to explore salary exchange schemes amid new figures which show they are central to a multi-billion pound missed opportunity.
New research has revealed the majority of UK small and medium-sized enterprises (SMEs) are missing out on a potential £2.7 billion in employer National Insurance contribution (NIC) savings by not using salary exchange schemes – also known as salary sacrifice.
Salary exchange allows employees to increase their pension contributions while also boosting their take-home pay after tax.
Despite these benefits, only 29 per cent of SMEs currently use the scheme which, if adopted more widely, could also generate up to £1.8 billion in employee savings.
Mark Leadley, Divisional Director at JF Hornby & Co, said: “At a time when SMEs are navigating financial pressures and employees are grappling with the cost of living, salary exchange is a powerful yet underused tool.
“The savings it unlocks can be reinvested into people, growth and resilience. It’s not necessarily about cutting costs; it can also be about building a stronger, more sustainable business.”
The findings come at a time when many SMEs are under pressure from rising NICs. In response, 33 per cent are passing costs onto customers, 32 per cent are freezing hiring, and 28% are delaying salary increases – all of which may offer short-term relief but risk long-term economic strain and reduced workforce morale.
The research, by insurance brokers, Howden, also highlights a significant knowledge gap: 36 per cent of SMEs are aware of salary exchange but have not explored it in detail, while 17 per cent remain completely unaware of its existence.
Salary exchange involves an agreement between an employee and their employer to reduce the employee’s salary in exchange for non-cash benefits – typically pension contributions.
For example, if an employee earning £30,000 agrees to sacrifice £1,000 of their salary for pension contributions, their taxable income drops to £29,000.
This reduces the amount of tax and NICs paid by both the employee and the employer. The employee benefits from increased pension savings and less by way of income tax, while the employer saves on NICs.
Mark said: “Anything that helps businesses support their teams while keeping costs under control is worth exploring. Salary exchange is one of those rare solutions that benefits everyone involved – and it’s surprising how few are making use of it.”
