Howden has reported that 68% of UK small and medium-sized enterprises (SMEs) are not using salary exchange to increase pension contributions or after-tax pay, despite growing fiscal pressures.
The findings come from a survey that examines how recent fiscal pressures are affecting SMEs, particularly in relation to workforce decisions and employee benefits.
The study points to limited use of salary exchange arrangements for pensions, despite their potential to reduce National Insurance (NI) liabilities for both employers and employees.
The report estimates that this gap in adoption equates to a missed opportunity of £2.7 billion in employer NI savings and £1.8 billion in savings for employees. On a salary of £38,000, salary exchange has the potential to raise pension contributions by 7.5% and boost take-home pay by 0.5%, supported by NI savings.
The survey of 523 senior decision-makers across UK SMEs found that cost pressures have altered business priorities. Before the most recent NI increase, 37% of SMEs had planned to increase employee salaries.
In addition, 31% intended to focus on business growth and 23% aimed to expand their workforce. These objectives have since been delayed or deprioritised as businesses respond to higher employment costs.
Cheryl Brennan (pictured above), managing director UK Employee Benefits at Howden, said salary exchange remains a largely untapped resource at a time when both employers and employees are facing cost-related pressures.
“Our research shows that the majority of SMEs are missing out on significant savings that could be reinvested into their people and growth,” she said. “With 28% of SMEs delaying pay increases and many employees facing financial strain, salary exchange offers a practical solution.”
The research also found that 33% of SMEs are responding to rising costs by passing them on to customers. Meanwhile, 32% have introduced hiring freezes and 28% have postponed salary increases. These measures indicate a shift towards cost containment among employers managing economic uncertainty.
This cost-management behaviour aligns with broader market data. A report from Simply Business highlighted that SMEs are under pressure from a combination of rising NI contributions, increases in the national minimum wage, and reductions in business rates relief.
Separate research from Premium Credit conducted in 2025 found that over half of SME leaders expressed concern about recent tax increases. The findings showed that 26% planned to limit employee pay increases, while 19% were preparing for recruitment freezes or intended to leave open roles unfilled.
Despite the potential benefits of salary exchange, only 29% of SMEs have implemented it for pension contributions. This leaves the majority of SMEs – and their employees – without access to combined potential NI savings estimated at £4.5 billion.
The report also highlights low levels of awareness and understanding of salary exchange. While 36% of SMEs are aware of the option but have not explored it in depth, 17% are unfamiliar with it altogether.
Among micro-SMEs, defined as businesses with fewer than 10 employees, just 12% are currently using salary exchange and 30% are unaware of it entirely. By contrast, 39% of larger SMEs are actively using the scheme, suggesting that firm size and access to benefits guidance may influence uptake.
The issue of employer-supported financial resilience was referenced in Rachel Reeves’ Mansion House speech, which identified the importance of employers in shaping workforce wellbeing. The report suggests that the introduction of salary exchange schemes could be one of the more immediate measures firms take to support employee financial outcomes, particularly in light of pending pension reforms.
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