Pay vs benefits: Why benefits need to work harder in 2026
Pay constraints are no longer a temporary squeeze but a structural feature of the reward landscape, and benefits are being asked to fill the gap.
With pay awards stuck at around 3%, employer national insurance contributions rising to 15% in April 2025, the National Living Wage increasing again to £12.71 from April 2026, and statutory sick pay now payable from day one, this is not a cycle to manage through. It is the environment reward professionals must now design for.
At the same time, the benefits most relied upon to compensate are becoming more expensive. UK healthcare costs are projected to rise by 10% in 2026 (WTW's Global Medical Trends Report). The result is a pincer effect: pay budgets constrained at exactly the moment meaningful benefits cost more.
Benefits can close that gap, but only if reward leaders make deliberate choices about which ones to protect, which to scrap, and how to communicate what already exists.
How benefits are balancing total reward
Three areas stand out where benefits are making a real difference:
1. Pensions: the benefit employees value most - and the last one to cut
Pension contributions rank among the most valued benefits employees receive. More than half (57%) of SME employees rated a strong workplace pension as "very important" when considering a job offer and 90% say their workplace pension influences their decision to remain in their job (Penfold’s Workplace Pensions Benchmarking Report).
In an environment where pay rises are limited, a strong pension offer is one of the most powerful tools available to demonstrate long-term commitment to employees' financial wellbeing.
Protecting and communicating that offer, particularly as rising NICs and wage floors increase pressure elsewhere, is a genuine differentiator in attraction and retention. However tight budgets become, pensions should be the last benefit to cut, not the first.
2. Flexibility as a genuine pay alternative - not a consolation prize
Eight out of ten (80%) of workers would accept additional paid time off in lieu of a pay rise, yet only 57% of employers currently prioritise this (Robert Half's 2026 UK Salary Guide). For many organisations, this represents a meaningful, low-cost way to bridge the gap between pay expectations and what the business can realistically afford.
Flexible working arrangements, performance bonuses and professional development opportunities are also gaining ground as credible alternatives where salary expectations cannot be met demonstrating that it is possible to remain competitive on talent without leading on pay.
3. Targeted wellbeing benefits: doing more with less
The shift happening across many organisations is from comprehensive provision to targeted, high-engagement offerings. Health cash plans and virtual GP access are holding up well, employees use them regularly, the cost remains manageable, and the impact on absence and productivity is measurable.
Where things go wrong is in cutting benefits like private medical insurance broadly, without a credible alternative in place. Done that way, it damages trust and signals that the employer's commitment to wellbeing is contingent on cost, precisely the message that drives attrition among mid- and senior-level employees who have choices. Cutting PMI without replacing it with something meaningful is not a strategy. It is a gap.
What reward leaders can do now
1. Communicate what already exists more effectively
Investing in how benefits are communicated can deliver more impact than adding new ones.
Intranet portals, webinars and "benefit of the month" features all help reinforce total reward value and ensure employees understand what they have access to.
A benefit employees do not know about, cannot understand or cannot easily access has no value, however generous it looks on paper. Embed benefits communication into onboarding, performance reviews and sickness conversations. Use total reward statements to make the full picture visible.
Perceived value matters as much as actual value and right now, most organisations are leaving significant perceived value on the table.
2. Use retention mechanisms that deliver real value without inflating base pay
One-off retention bonuses, where neither employer nor employee pays pension contributions, offer a meaningful financial reward without the permanent cost implications of a base pay increase. Length-of-service leave also rewards loyalty without material direct cost.
Salary sacrifice arrangements are also worth revisiting: by exchanging a portion of salary for a non-cash benefit, both parties reduce their NIC liability, stretching reward value without increasing cost.
Financial advice is one of the least-used options available under salary sacrifice, yet for employees navigating pension decisions and long-term financial planning, it can be one of the most impactful, and the NIC saving makes it cost-neutral or better for most organisations to provide.
Finally, transparent career pathways and progression frameworks give employees a credible future within the organisation, and in a market where pay differentiation is limited, that increasingly matters. The risk of not providing either is subtle but real. High-potential employees begin optimising for financial safety over growth, internal mobility slows, and succession pipelines quietly narrow, none of which shows up in an engagement survey until it is too late.
3. Make deliberate choices about portfolio design
This is the hardest ask, because it requires conversations that are politically uncomfortable. A useful starting point is a simple utilisation audit: for each benefit in your portfolio, ask what proportion of eligible employees actually used it in the past 12 months. Low utilisation is not always a reason to cut, sometimes it signals a communication problem rather than a value problem, but it is always a reason to ask the question.
Which benefits drive the most engagement? Which are consistently underused? Which, however embedded in culture or legacy agreements, no longer justify their cost?
Incremental fixes are no longer sufficient. Progress comes from redesigning reward strategy for sustained financial pressure, not patching frameworks built for a different environment.
That means making genuine trade-offs, communicating them honestly, and being transparent with employees about the operating environment, while demonstrating a real commitment to their long-term financial security.
A defining test of reward strategy
The underlying challenge for reward professionals in 2026 is not simply cost management. It is strategic positioning.
Organisations that continue treating benefits as a line item to reduce, rather than a strategic tool to deploy, will find themselves less able to retain the people they most need to keep. The gap between pay and employee expectations is real and is not closing.
The choice is straightforward: design your total reward strategy now, or risk losing the people you can least afford to lose.
Good employees have options. A well-designed, clearly communicated reward proposition gives them a reason to stay.
Supplied by REBA Associate Member, Avantus
Flexible Benefits & Technology specialist providing online, highly configurable platforms to Customers and Intermediaries worldwide.
