Mark HamsonSmall and mid-sized employers (SMEs) are making brutal decisions about employee benefits right now. It’s not a question of fine-tuning anymore – it’s about what they can actually afford to keep.
Healthcare inflation hit 10.6% in the UK last year, among the highest rates in Western Europe. Forecasts suggest global medical costs will rise by more than 10% in 2026, with Europe-wide increases expected above 8%. National Insurance increases are adding hundreds of pounds per employee on top of that. For a business with 50 to 100 people, that could mean an additional £20-30,000 in annual costs, plus the added tariff of Insurance Premium Tax. That’s not a rounding error – it’s a real hit to what they can spend elsewhere.
Why SMEs feel the pressure differently
It’s not just that costs are rising, but also that smaller employers have fewer ways to absorb them. Large corporates can negotiate volume discounts on group insurance and healthcare plans. They’ve got dedicated HR teams who can spend time optimising benefits and finding tax-efficient alternatives. They’ve got the financial buffer to weather a difficult year.
SMEs don’t have any of that. They’re paying proportionally more per employee for the same benefits. The administrative costs of setting up and running benefit schemes hit harder when you’re spreading them across 50 or 100 people instead of thousands. And there’s often no HR director – it’s the business owner or finance director trying to figure this out alongside everything else.
When regulatory costs increase (National Minimum Wage rises, higher employer National Insurance contributions), they hit SME payroll budgets much harder. There’s no deep financial reserve to draw from. The impact on profit margins is immediate.
And yet, they’re competing for talent against larger firms that can offer comprehensive benefits packages. SMEs are being asked to match what bigger companies offer, without the economies of scale or expertise to make it work at the same cost.
So, we’re seeing a clear pattern emerge in conversations with SME clients who are making decisions about what stays and what goes…
What’s staying, what’s going
What’s being protected: Low-cost, high-use benefits. Health cash plans and virtual GP access are staying put because employees use them regularly and the costs are manageable. These cover the everyday health essentials such as dental appointments, physiotherapy and optical care.
What’s being reconsidered: Traditional private medical insurance is being looked at hard. Some employers are restricting PMI to senior staff only. Others are moving to access-only models where employees pay their own premiums. And we’re seeing a marked rise in employers choosing private health insurance, which covers everday health and wellbeing, without the full cost of comprehensive PMI which covers the more acute conditions and complex hospital treatments.
What’s being cut first: Income protection, enhanced sick pay, gym memberships, training budgets, team events. These benefits matter, but when budgets are tight, they’re the first to go.
It’s not that employers don’t care
This isn’t about stepping back from employee wellbeing. It’s about making impossible choices under real financial pressure. Employees need health support now more than ever – NHS waiting times haven’t improved, absence levels are rising, and many people report feeling physically and mentally worse than they did a few years ago.
When someone can’t get timely access to care, it affects the whole business. For a 75-person company, losing even one team member to long-term absence has a disproportionate impact. Support that helps people stay well, stay at work or facilitate a speedy return to the work, such as physiotherapy, mental health services and early access to primary care all make a real difference. But it has to be affordable.
The traditional model isn’t working anymore
Benefit renewals and 2026 planning are happening right now, and SME clients are telling us they can’t keep doing what they’ve always done. The traditional benefits model which offers a broad range of support at escalating costs isn’t sustainable at current inflation rates, especially when you’re paying more per head than your larger competitors.
What’s emerging instead is a more focused approach. Employers are concentrating on benefits that their specific workforce actually uses and values. For many, that means keeping the everyday health support that gets used regularly while adding protection for the times that really matter. When someone needs a scan without an anxious wait or a specialist consultation without the uncertainty, it’s there for them.
It’s about combining what people use regularly with what they need when things get serious, rather than trying to offer everything and potentially having to cut back on all of it.
What this means going forward
Cost pressures aren’t easing. Smaller employers are absorbing these increases without the purchasing power or expertise to negotiate better deals. The employers who’ll navigate this best are the ones staying close to what their people actually need and making practical decisions about where to invest.
That might mean a benefits package that looks different to what they offered two years ago. But if it focuses on the healthcare people actually use day-to-day, combined with protection for when things get serious, it’s going to be far more sustainable than spreading the budget too thin.
Mark Hamson is managing director of Insurance at Westfield Health
