In the 12 months to January 2022, inflation reached 5.5%. Prices have risen faster than they have in the last 30 years and when coupled with additional increases, such as the increase in National Insurance contributions, the cost of living has increased significantly in recent months. By April this year, the Bank of England has suggested that inflation could reach 7%, pushing the cost of living up further still. Salaries are not keeping up with these increases, meaning employees may be facing additional financial worries and stress that employers should consider.
The rising cost of living
Wages have not increased proportionately with the increased bills and expenses. Taking the average prices of 5.5% into account, real pay fell by 0.8% in comparison. This means that many employees are having to adapt to having less money to spend even if they have received a pay rise.
Inflation has seen prices of all goods and services increase, from petrol to groceries and clothing. Next, the retailer, has suggested that its prices may increase by 6% in order to keep up with the higher supply costs. Supermarkets have increased their prices of most household groceries, meaning that the annual average spend on groceries could increase by £180 for the average person in 2022. Fuel prices have also increased significantly in recent months.
National Insurance contributions are also set to rise in April this year, which means that those on an annual salary of £30,000 will contribute a further £251 per year. Graduates and the youngest members of the workforce will shoulder the greatest burden. For example, a graduate earning more than £27,295 per year will pay a marginal tax rate of 42.25% once the increased National Insurance is deducted from their wages, along with Income Tax and student loan repayments.
Rising energy prices are contributing significantly to the increasing cost of living, with the average gas and electricity bills set to go up by £693 a year from April because of the rising costs of supply. Ofgem increased the price cap on energy by 54%.
What can employers do to help their employees?
One option for employers is to increase salaries in line with the current inflation rate, so that salaries are increased in proportion with the rising prices. The National Living Wage, a legal minimum hourly rate of pay set by the Government for those over 23, is set to increase in April by 6.6%, more than the current inflation rate, to £9.50 an hour. Employers could also consider the Real Living Wage. The Living Wage Foundation have calculated what the actual hourly rate should be to take into account the real costs of living and increased utilities and bills. The Foundation suggests an hourly rate of £9.90 for those working outside of London, and £11.05 for those working in the capital. Pay at this rate would allow employees to meet the rising costs, although this rate is not a legal requirement unlike the National Living Wage. Currently 9,000 businesses in the UK have voluntarily adopted the Real Living Wage rate of pay.
Increasing salaries could also address potential staff shortages reported in some industries, as it could encourage employees to seek out new job opportunities. In some industries such as haulage, staff are in high demand and as a result, the average salary has already increased above the current rate of inflation.
However, after struggling to survive the Covid-19 pandemic and facing rising supply costs, many employers are simply unable to increase all wages across the business. Nevertheless, employers can support its workforce in other ways, either in addition to or instead of significant wage increases.
It is important for employers to be aware that some of its workforce might be experiencing financial difficulties at home. This can create additional stress for employees, which can sometimes negatively affect working life and employee wellbeing. Demonstrating an awareness of this and providing employees with opportunities to discuss their financial worries can help to ease some of the stress that they may be experiencing.
Alternatively, some employers may be able to introduce paid overtime opportunities. This would allow employees to pick up some additional work in exchange for some additional pay, without necessarily increasing wages. This may provide employers with a flexible means of supporting its employees, but of course does not guarantee that all employees can and will benefit.
Additionally, employers could review the benefits packages they offer to employees. Many employers choose to offer salary sacrifice benefits, where employees can surrender part of their salary in exchange for an additional benefit such as a gym membership or private medical insurance. These schemes are sometimes open once a year to employees to opt in and out of the various benefits offered, which can become a problem if an employee’s financial situation changes at a later stage. Allowing employees greater flexibility with the benefits that they can choose may lessen the financial burden potentially brought on by the price rises.
There are many online resources available on the subject of budgeting and saving money, such as from Martin Lewis and his Money Saving Expert website. There are also useful shopping lists available online, offering budget-friendly meal plans and recipes, with a helpful shopping list for the supermarket. Assisting employees to find these resources in a company newsletter for example, may help some employees adapt to the rising costs we are all facing, and also helps to demonstrate that employers understand the difficulties they face.
We would encourage all employers to consider the predicted increases in the cost of living when reviewing the remuneration packages that they are offering to their employees. Employers should also reflect on the support that it has in place for its workforce when facing personal worries or stress such as those around finances. These can have a detrimental effect on the wellbeing of employees which inevitably impacts productivity and the business as a whole. It is important to introduce appropriate measures to combat this.