Small and medium-sized enterprises (SMEs) are the backbone of the UK economy, comprising 99.9% of businesses and supporting 27 million jobs[i]. However, with the CBI Economic Forecast[ii] predicting slower growth in 2025 following Budget cost pressures, they face mounting pressures to overcome recruitment challenges, rising costs, and increasing demands from employees.
To stay competitive, SMEs must rethink their approach to employee benefits. What was once considered a set of perks is now a strategic necessity as a well-designed benefits package can improve workforce wellbeing, attract top talent, and help businesses weather economic uncertainty.
This is reflected in Employee Benefit Trends in UK SMEs, a new report by Howden Employee Benefits in partnership with YouGov. The report highlights that over three-quarters (77%) of SMEs plan to overhaul their benefits offerings to address their workforce challenges.
The Key Challenges Facing SMEs
SMEs face significant workforce challenges:
- Sickness absence and health concerns: With sickness absence at a 15-year high and 104.9 million workdays lost in 2023 due to long-term health conditions[iii], SMEs must prioritise employee health and wellbeing.
- Economic strain: The cost-of-living crisis, rising employer National Insurance Contributions (NICs), and financial pressures are stretching budgets more thinly.
- Retention and recruitment: Almost a third (29%) of SMEs cite recruitment and retention as major hurdles. Employees now prioritise benefits like pensions, healthcare, and mental health support when evaluating employers.
Five Steps SMEs Can Take to Overhaul Benefits
- Consider salary sacrifice
Following the autumn budget announcement of a hike in National Insurance SMEs are seeking new ways to make savings. One option is to offer salary sacrifice. By implementing this, employers can save 15% on Employer NICs on employees’ pension contributions, helping offset some additional costs whilst making a positive contribution to their employee’s retirement outcomes.
- Ensure pension compliance and enhance contributions
While 85% of SMEs offer some form of workplace pension, research shows that worrying 15% are failing to comply with pension legislation, leaving them vulnerable to potential fines. SMEs must make sure they are compliant and enhance contributions to differentiate themselves in a competitive market. With upcoming changes to auto-enrolment contribution thresholds and the reduction of the minimum age for auto-enrolment, now is the perfect time to review both pension contributions and broader remuneration strategies to provide employees with greater financial security.
- Expand healthcare and mental health support
Healthcare benefits are a key area for improvement in 2025 given only 53% of SMEs are offering Private Medical Insurance (PMI) and 49% providing mental health support. According to the BMA Scotland’s annual winter pressures survey 76% of doctors were extremely concerned about the impact of increased pressures on the NHS throughout the winter. With the NHS in crisis mode and hospitals operating at 115-120% capacity, more and more people are being forced to go private. Expanding these benefits ensures timely healthcare access and helps employees manage stress, reduce absenteeism and increase their productivity. Initiatives like Employee Assistance Programmes (EAPs), mental health first aid training, and wellbeing apps are affordable ways to make an immediate impact.
4 Embrace flexible benefits
Demand for flexible benefits is growing, especially from companies with multi-generational workforces with diverse needs. Introducing flexible benefits allows employees to personalise their packages, choosing options like gym memberships, lifestyle discounts, or additional insurance cover to suit their circumstances. This is especially helpful as people move through different life phases and priorities change. In 2025, offering choice can enhance employee engagement and support recruitment and retention.
- Introduce lifestyle and protection benefits
Lifestyle benefits are gaining traction, with 38% of SMEs planning to add perks like gym memberships or wellbeing discounts to their packages. At the same time, protection-focused benefits such as Critical Illness Insurance (36%) and Group Life Assurance (31%) provide employees and their families with financial security during health crises. These options demonstrate a genuine commitment to employee wellbeing and supporting people when they need it most.
Why employee benefits matter more than ever in 2025
Investing in employee benefits is no longer just about staying competitive; it’s a vital strategy for building business resilience. Comprehensive benefits play a crucial role in supporting employee wellbeing, reducing absenteeism, and driving productivity. As financial pressures mount and employee expectations shift, SMEs need to adapt in order to attract and retain current staff and future talent.
The workplace is changing rapidly, and SMEs need benefits packages that keep pace. By enhancing pensions, prioritising healthcare and mental wellbeing, offering flexible, tailored options, and using tax-efficient solutions, businesses can effectively address workforce challenges. These steps not only improve employee satisfaction but also help SMEs build a thriving, engaged workforce ready to navigate an uncertain economic climate.
In 2025, success will belong to those businesses that see employee benefits not as an expense, but as a forward-thinking investment in their people and their long-term success and sustainability.
Download the full report here: Howden Employee Benefits.
Article written. By Mark Fosh, Executive Director of SME at Howden Employee Benefits