Smarter Benefits: Protecting UK Competitiveness

By Jonathan Attia

UK employers face rising staffing costs from higher NICs, frozen tax thresholds and escalating benefit expenses. With subdued productivity, smarter benefits, focusing on prevention, financial resilience and tax efficiency, offer cost control and employee value. Strategic optimisation and clear communication can enhance competitiveness without expanding fixed payroll in an increasingly constrained environment. 

UK employers are entering one of the most expensive periods for staffing in decades. The rise in employer National Insurance Contributions (NICs) to 15%, alongside the freeze on Income Tax thresholds, has materially changed the economics of workforce benefits. At the same time, productivity growth remains subdued, with the UK behind the US when compared with pre-pandemic levels. 

The result is a widening gap between labour costs and value creation. For boards and finance leaders, the question is no longer just how much to increase pay, but how to also provide value to employees without compromising competitiveness.  

The answer lies in smarter benefits. In today’s climate, employee benefits are not discretionary perks; they are financial tools that help organisations manage statutory cost pressures while still offering meaningful value, even when pay growth is modest. 

The cost squeeze  

Even without further fiscal tightening, employers continue to absorb the structural impact of higher NICs. As a rule of thumb, a 1 percentage point rise adds £1,000 for every £100,000 of payroll. For a business with a £20 million wage bill, this could equate to approximately £200,000 annually, before factoring in National Living Wage increases and pension contributions.  

Fiscal drag compounds the challenge. As wages rise, more employees move into higher Income Tax bands. The Institute for Fiscal Studies estimates that millions more workers will pay higher or additional rates by 2028 due to frozen thresholds. Employers, therefore, face a structural inefficiency: pay costs rise, but the net benefit to employees diminishes.  

Median pay awards reached 3-3.5% in 2025 and are expected to remain similar in 2026, with potential compression to 2-3% by 2027. In real terms, this implies flat or marginal income growth, particularly as core inflation has remained above the Bank of England’s 2% target in recent years.  

Meanwhile, near-10% increases in the National Living Wage have required significant adjustments at the lower end of pay scales, often triggering compression further up. Payroll budgets are increasingly being absorbed by compliance rather than competitive differentiation.  

Rising benefit costs 

The pressure extends beyond salary. Private Medical Insurance (PMI) premiums have risen sharply amid sustained double-digit claims inflation and increased demand for private treatment as pressure on NHS waiting lists persists. Employers are facing recurring renewal increases, particularly in schemes with high utilisation.  

Minimum auto-enrolment pension contributions remain set at 8% of qualifying earnings, and forthcoming changes – including mandatory payroll reporting of all Benefits-in-Kind by 2027 and adjustments to salary sacrifice NIC treatment from 2029 – will further influence cost profiles and compliance burdens.  

However, while the instinct to cut back on wellbeing enhancing benefits is understandable, it’s short-sighted, risking future cost increases through increased absenteeism and employee turnover. The more strategic response is to reallocate toward initiatives that offer real value to your workforce while delivering measurable returns for your business.  

Prevention as cost control 

Investment in preventative health illustrates the opportunity. Well-designed workplace wellbeing programmes can generate returns of up to £8 for every £1 invested through lower absenteeism, reduced claims, and improved productivity.  

Poor workplace health, including sickness absence, presenteeism, and related productivity loss, is a significant cost for UK employers, amounting to around £85 billion annually. With the average employee taking 9.4 sick days in 2025, even modest reductions can generate meaningful savings in large workforces.  

Redirecting spend from reactive treatment to preventative support, such as lifestyle programmes, early intervention, and mental health provision, helps contain long-term insurance inflation while strengthening organisational resilience. For finance leaders, this positions wellbeing as a cost-containment strategy rather than a discretionary spend.

Financial resilience and productivity  

Financial stress is similarly costly. Nearly one-third of UK employees have less than £1,000 in savings, increasing their vulnerability to economic shocks and correlating with lower productivity and higher turnover.  

Smarter benefits strategy can mitigate this, closing the gap left by stagnated pay increases. Salary-linked savings schemes, payroll deduction mechanisms, and access to affordable credit can help employees build stability at relatively low cost to employers.  

Some initiatives are cost-neutral or cost-positive. Annual Leave Purchase Schemes, for example, allow employees to exchange salary for additional leave, significantly reducing your wage bill when structured effectively.  

This is the core principle of smarter benefits strategies: using the tax savings potential intelligently to create mutual economic value for both employees and employers.  

Strategic priorities for FY27 

Three priorities should shape benefit strategies as organisations plan for FY27. 

The first is audit utilisation and return on investment. Redirecting even a percentage of underused benefits spend into new offerings that are tailored to what teams need can materially strengthen high-impact programmes.  

Second, optimise for tax efficiency. From April 2026, expanded tax-free health and wellbeing reimbursements will enable employers to support employees without inflating payroll. Structured salary sacrifice arrangements, where applicable, can further mitigate NIC exposure.  

Finally, communicate total benefits transparently. Research shows a significant gap between the investment employers make in benefits and the extent to which employees appreciate them. One survey found that nearly 80% of employees underestimated their total compensation, including benefits, when they were not fully informed. Other studies indicate that only about half of employees recognise the value of benefits provided to them. Clear reporting can enhance perceived value at no additional cost.

Competitiveness in a constrained era 

With productivity growth modest and public finances tight, sustained above-inflation pay growth is unlikely to define retention strategies in the years ahead. However, attracting and retaining talent remains central to performance.  

Benefits have evolved into core financial instruments. They help manage statutory cost pressures, strengthen resilience, and enhance engagement without permanently increasing fixed payroll – a crucial advantage when 74% of employees consider an organisation’s benefits package when deciding whether to accept a job offer.

In a constrained environment, organisations that invest intelligently will stand out. A well-designed benefits strategy can amplify the impact of a 3% pay rise, reduce absence-related costs, and generate NIC efficiencies.

Smarter benefits are no longer a peripheral HR consideration. They are a central lever of financial strategy and increasingly play a vital role in determining long-term UK competitiveness. 

About the Author

Jonathan Attia – CEO of Pluxee UK is an experienced leader with nearly 20 years in building and leading high‑performing teams. Former CEO of Wiise and Consulting Partner and Head of Digital Products at KPMG, he now leads Pluxee UK, focused on empowering people and organisations to thrive through purposeful technology and impactful employee benefits.