Modernising benefits is critical for UK’s competitive edge

UK organisations are facing one of the sharpest increases in employment costs seen in a generation. The rise in employer National Insurance Contributions (NICs) to 15%, alongside the continued freeze on Income Tax thresholds, is reshaping the financial dynamics of pay and benefits.

 

For boards, the challenge is no longer simply determining how much to increase salaries. Instead, it is how to continue delivering value to employees while maintaining competitiveness as labour costs rise.

 

The pressure is being intensified by weak productivity growth. UK output per hour has risen by only around 1.5% compared with pre-pandemic levels, leaving the country behind European peers such as France and Germany. The result is a widening gap between the cost of labour and the value it generates.

 

This is where a more strategic approach to benefits comes in. In the current environment, benefits should not be viewed as optional extras. Well-structured, they can help employers manage statutory cost pressures while still providing tangible support to employees, even when pay growth remains constrained.

 

 

The rising cost burden

Even without additional policy changes, employers are still adjusting to the lasting cost pressures created by higher NICs. Every 1 percentage point increase in employer NICs adds roughly £1,000 for every £100,000 of payroll. For an organisation with a £50 million payroll, the same increase would mean roughly £500,000 in additional annual costs, before accounting for rising National Living Wage levels or mandatory pension contributions.

 

At the same time, frozen Income Tax thresholds are quietly intensifying the challenge. As wages increase, more employees are pulled into higher tax brackets, with millions more workers estimated to pay higher or additional tax rates by 2028 as a result of this threshold freeze. The outcome is a structural inefficiency for employers, where organisations pay more in wages, yet employees see less improvement in their take-home pay.

 

Pay trends illustrate the constraint clearly. Median pay awards were around 3-3.5% in 2025 and are projected to stay in a similar range through 2026, with forecasts suggesting they could ease to roughly 2-3% by 2027. When set against inflation that has persistently exceeded the Bank of England’s 2% target in recent years, these rises translate into little, if any, meaningful growth in real incomes.

 

 

Rising costs beyond salaries

However, financial pressure on employers isn’t limited to salaries. Private Medical Insurance (PMI) premiums have surged, driven by persistent double-digit claims inflation and growing demand for private treatment as NHS waiting times remain high. Renewal costs are particularly steep for schemes with high utilisations, creating ongoing budgetary strain.

 

Pension obligations also continue to weigh on employers. Minimum auto-enrolment contributions remain at 8% of qualifying earnings, while upcoming regulatory changes, including mandatory payroll reporting of all Benefits-in-Kind by 2027, will further affect cost structures and compliance requirements.

 

Cutting back on well-being or employee-focused benefits may seem like a natural cost-saving step, but this approach is short-sighted. Reduced investment in workforce support can drive higher absenteeism and staff turnover, ultimately raising costs. A more effective strategy is to prioritise initiatives that deliver value to employees while creating measurable benefits to the business.

 

 

Strengthening financial resilience and performance

Investment in financial resilience illustrates the opportunity. Close to one in three UK employees have less than £1,000 in savings, leaving many exposed to unexpected financial shocks. This level of vulnerability is linked to lower workplace productivity and higher rates of employee turnover.

 

A smarter benefits strategy can help address this challenge by providing support that pay rises alone may no longer deliver. Tools such as salary-linked savings schemes, payroll deduction programmes and access to fair, affordable credit can strengthen employees’ financial resilience without placing a significant burden on employers.

 

Some initiatives can even reduce overall employment costs. Annual leave purchase schemes, for example, enable employees to exchange a portion of their salary for additional time off. When implemented effectively, these arrangements can lower payroll expenditure while still enhancing perceived employee value.

 

At its heart, a smarter benefits strategy is about making better use of tax and structural efficiencies already available, designing strategies that create financial advantages for employers while also delivering support for employees.

 

 

Shaping benefits strategies for FY27

As organisations plan for the next fiscal year, three strategic areas should guide decisions around employee benefits.

 

First, assessing utilisation and return on investment is critical. Identifying which benefits are underused and redirecting even a small portion of spend toward programmes that meet employee needs can significantly strengthen high-impact offerings.

 

Enhancing tax efficiency is another key priority. From April 2026, expanded tax-free health and wellbeing reimbursements will allow employers to support employees without inflating payroll costs. Well-structured salary sacrifice arrangements, where appropriate, can further reduce NIC exposure, creating benefits for both the organisation and its employees.

 

Lastly, communicating the full value of benefits is essential. Research shows a persistent gap between what employers invest in and what employees perceive. Nearly 80% of employees underestimate their total compensation when benefits are not clearly explained, and only around half fully recognise the value of the benefits they receive. Transparent reporting and effective communication can significantly increase perceived value at little or no extra cost.

 

 

Smarter benefits, stronger business

With modest productivity growth and public finances under pressure, above-inflation pay rises alone are unlikely to drive retention. Yet attracting and retaining talent continues to be critical to organisational performance.

 

Employee benefits have moved beyond operational extras to become essential financial instruments. They help manage statutory cost pressures, support workforce resilience, and boost engagement, without permanently inflating payroll.

 

Organisations that use benefits strategically will gain a distinct advantage. Well-designed programmes can amplify modest pay increases, reduce absence costs, and deliver NIC efficiencies. Employee benefits are no longer just an HR matter; they have become a strategic financial tool and a key driver of long-term UK competitiveness.

 

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Jonathan Attia is CEO at Pluxee UK  

 

Main image courtesy of iStockPhoto.com and Benjamas Deekam