In an already challenging economic environment, the chancellor’s increase in national insurance has been one of the most damaging to the UK’s SMEs. As it gets more expensive to employ people, many business owners have been forced to re-evaluate their staffing levels which has impacted growth plans.
Talking to some of our customers, I have found that a significant opportunity to save money and reward employees is being overlooked. What is this opportunity? Salary exchange. Does it affect your business? According to new research, UK SMEs are collectively missing out on as much as £2.7 billion in potential national insurance (NI) savings alone.
What is salary exchange?
Also known as salary sacrifice, this is a tax-efficient arrangement that allows an employee to give up a portion of their gross salary in exchange for a non-cash benefit. While the most common use of this scheme is to increase pension contributions, it can also be used for a wide range of other valuable benefits, such as health insurance, company cars (including electric vehicles), or gym memberships.
By reducing the employee’s taxable salary, both the employer and the employee benefit from paying less national insurance. The savings generated can then be strategically reinvested, either to enhance the employee’s benefits or to boost their take-home pay, all without increasing the company’s total employment costs.
This is a win-win solution that directly addresses the needs of both the company and its staff, offering a flexible and cost-effective way to improve your overall employee value proposition.
A missed opportunity
What is holding back a large majority of UK SMEs from adopting salary exchange schemes? A key barrier appears to be a lack of knowledge; many business leaders are either completely unaware of the concept or haven’t fully explored its potential. This is particularly true for micro-SMEs, where adoption rates are especially low.
Here’s a quick example: without a salary exchange scheme, an employee with a £38,000 salary might take home approximately £31,000, paying around £2,000 in national insurance. With a salary exchange scheme, that same employee could sacrifice a portion of their gross pay to receive a gym membership and a significant boost to their pension contributions. As their gross salary is now lower, their NI payments also decrease, benefiting both them and the company. While their take-home pay might be slightly lower than before the exchange, the overall value of their compensation package is greater.
A strategic alternative
Cutting pay and freezing hiring sends a bad signal to your employees. Finding a smarter way to give them more benefits and pay less NI feels like a more constructive and proactive alternative.
Some of the benefits could include:
- Cycle to work schemes to help employees buy a bike and cycling safety equipment.
- Electric vehicle (EV) schemes for employees to lease an electric car.
- Existing childcare is covered (though be careful – new entrants to the childcare voucher scheme are not).
- Technology schemes allowing employees to purchase laptops, tablets, or smartphones.
- Health and wellness, from gyms to health insurance and dental plans.
- Holiday trading: some schemes allow employees to ‘buy’ or ‘sell’ extra days of annual leave.
As an SME owner, you can both cut costs and find ways to give your employees an enhanced benefits package. Once you understand the principle and the schemes allowed under the rules, you could save a substantial amount of money while strengthening your value proposition as an employer, positioning the business for sustainable growth. Who wouldn’t want a slice of that £2.7 billion?
