The report also highlighted that the highest concern for businesses in October 2024 was falling demand for goods and services, with 14.1% of businesses surveyed highlighting this. This is an increase of almost 6% compared to the same period in 2023 . Additionally, increasing number of businesses said they were concerned by taxation (11.5% in October 2024 compared to 5.8% last year).

In this environment, every opportunity to strengthen financial resilience matters, and businesses must balance the twin pressures of controlling costs while attracting and retaining skilled people.

One of the most effective, but underutilised, mechanisms available is salary exchange. Properly implemented, it can unlock billions of pounds in savings for businesses and their employees, without any increase in overall cost.

New research by Howden Employee Benefits , conducted in partnership with YouGov, highlights that despite salary exchange being a well-established and tax efficient strategy, 68% of UK SMEs are not using it, potentially missing out on an estimated £2.7 billion in employer National Insurance (NI) savings and £1.8 billion in employee savings. In total, SMEs and their workforces are missing out on £4.5 billion annually

Understanding salary exchange

Salary exchange, sometimes called salary sacrifice, is straightforward. Employees agree to reduce their gross salary in return for a non-cash benefit of equivalent value, most commonly pension contributions.

Because gross taxable income is lower, both employer and employee National Insurance liabilities are reduced. The savings can then be reinvested; enhancing pension contributions or increasing employees’ net take-home pay.

For example, on a salary of £38,000, salary exchange can boost pension contributions by 7.5% and increase take-home pay by 0.5%, without raising total employer costs. This means employees can save more for retirement while enjoying slightly higher take-home pay, all at no extra cost to their employer.

Barriers to adoption

Despite these advantages, only 29% of UK SMEs currently use salary exchange. The research suggests that lack of awareness and guidance is a key barrier. Over a third (36%) of SME leaders know about salary exchange but haven’t explored it fully, and 17% are unaware it exists. Among micro SMEs (those with fewer than 10 employees), adoption is especially low, just 12% use it, and 30% are completely unfamiliar with the scheme.

Larger SMEs (over 50 employees) are more likely to take advantage, with 39% having implemented salary exchange and found it effective. This suggests that scale, access to HR support, and professional advice are critical enablers.

The cost of inaction

The April 2025 increase in employer National Insurance contributions has intensified pressures. Before the change, 37% of SMEs intended to increase salaries, but many have since delayed or cancelled those plans. Similarly, growth investments (31%) and recruitment (23%) have been deferred as businesses prioritise cost containment.

Some SMEs have responded with measures such as freezing pay, postponing hiring, or passing costs onto customers. However, these approaches can erode employee morale and hinder long-term growth. By contrast, salary exchange provides a scalable solution that enhances employee value and supports retention.

Adopting salary exchange not only benefits individual businesses but also supports wider policy objectives. It strengthens pension savings, improves financial resilience, and helps employees manage cost-of-living pressures. Meanwhile, employers can reinvest National Insurance savings into growth, staff development, or enhanced benefits, such as financial wellbeing programmes.

Implementing salary exchange

Introducing a scheme does not have to be complex. Four practical steps can help start-ups get started:

• Evaluating the opportunity: analyse current payroll and pension contributions to estimate potential savings
• Communicating clearly: educate employees using accessible, jargon-free language
• Ensuring compliance: align the scheme with tax regulations and auto-enrolment rules
• Reinvesting the savings: use NI savings to reinvest into employees’ pension pots, or enhance employee support, such as financial wellbeing programmes

A strategic advantage

Startups face an uncertain and demanding economic environment. Salary exchange offers a rare opportunity for them to create mutual value: strengthening balance sheets while enhancing employee outcomes. With rising costs and intense competition for talent, this is not a mechanism startup can afford to overlook. By adopting it, they can transform a missed opportunity into a strategic advantage to help them survive and thrive.

Howden has an online salary sacrifice calculator for businesses to work out the National Insurance savings if they introduced salary sacrifice.

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