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17 Mar 2023
by Sarah Lardner

Pay during the cost-of-living storm: 8 steps to resilience

With few businesses able to afford inflation-busting pay rises, what can they do instead?

Pay during the cost-of-living crisis: 8 steps to resilience.jpg 1


According to Resolution Foundation think tank, the typical disposable income for a working-age household in the UK is on track to fall by 3% this financial year and by 4% in the year to April 2024, worse than during the last financial crisis.

The figures vary but the key message is the same: employees are going to feel worse off in real terms.

Few organisations will be able to afford inflation-busting pay increases, so what is the answer?

Building pay resilience

1. Understand pay in your market

  • Know the going rate for your employee roles and how you align with the market
  • Understand what other companies are doing to keep pace with change
  • Position your pay stance as competitive
  • Do not be in the 0-25 percentile or you will always be playing catch-up
  • Predict National Living Wage increases and try to maintain a healthy differential
  • Sign up for the London living wage

2. Enable pay progression

  • Create a framework to enable employees to progress their pay
  • This can be aligned to performance, competence or both – ensuring measures and assessment ensure return on investment.

3. Assess discretionary promotions

  • Are these promotions simply a way to achieve a higher salary?
  • Ensure salary increases via promotion are given for the right reasons
  • Make sure the decision-making is fair and consistent

4. Review other ad hoc pay increases

  • Look at why did were given, who received them and why
  • How much did it cost the business? Could that money be better spent?
  • Incorporating this spend into a pay review budget is fairer and provides a better return on investment

5. Make sure pay is targeted and fair

  • Prioritise pay adjustments to address low pay against the market, market premiums, flight risks and the lowest pay
  • Monitor your pay approach to mitigate equal pay claims
  • Put a strategy in place to improve your gender and ethnicity pay gap.

6. Protect the lowest paid

  • Guard against cost-of-living payments affecting universal credit and other benefits
  • Tailor the timing and delivery of any extra money to the individual’s need.

7. Protect the higher earners

There are significant tax implications when a pay rise tips higher earners over £100,000 a year. In real terms, for a single parent with three children, earning £1 more than £99,999 in salary could cost more than £14,000 in lost tax allowances and childcare. Opting instead for salary sacrifice schemes or enhanced pension could mean keeping this money.

  • A single parent earning £100,000 loses £2,000 tax-free childcare per child
  • Government-funded term time childcare reduced from 30 to 15 hours = £7,952 cost, according to the Coram Childcare report
  • £12,570 tax-free personal allowance is tapered away at a rate of £1 for every £2 earned between £100,000 and £125,140
  • A National Insurance rise of 2%
  • Potential student loan repayments at 9%

8. Explore business efficiencies

  • Efficiencies you have put off but which you could now put into practice could free up cash to raise base pay
  • Some companies are drawing down against savings or tightening their belt to give staff increases earlier than planned.

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