The Office for National Statistics has now announced two months in which the inflation over the previous months has been 8%. There are threats of more inflation to come.

There have also been tax increases that increase the cost of employing your staff and reduce their paypacket for a standstill wage.  Employees & Employers are each paying 1.25% more on National Insurance (NI) since April 2022. However from 6 July the threshold for employees to pay NI, is rising from £9,880 to £12,570, bringing it in line with the income tax personal allowance.

Taking all this into account, by how much should you, as an employer, be prepared to increase your staff wages to compensate?

There are a number of ways of thinking about this: for example: compare to the overall wages growth (currently less than inflation), or see if you can match awards in similar sectors, or consider what non – monetary rewards you can grant such as increased leave.

Another approach is to consider the net worth of a payslip now compared to a year ago.  The maths are complex but the intention is to match pay to the new reality of inflation. Let us take some examples to show the likely effect on the overall wage costs of your business.  Say you want to make sure that an employee is getting the same value in their pay now as they were last year –

A. £1,500 pm take home last year was based on a Salary then of £21,084, which cost you £23962 incl pension.  An 8% inflation rise takes that salary to £1,620 pm take home on a Salary of £23,393 gross.  This will cost your business £25,554 incl Employer NI. Add on the employer pension of £1372 and you get £26,926.  This 8% rise in take home pay will cost the business 12% more.

B. £2,000 pm take home last year was based on a Salary then of £29,904, which cost you £34,704 incl pension. That salary now needs to increase to £2,160 pm take home on a Salary of £33,101 which will cost you £36,713. Add on the employer pension of £2,648 and you get £39,361 (ie 13% more).

C. £3,000 pm take home last year was based on a Salary then of £47,556, which cost you £56,204 incl pension. That salary now needs to increase to £3,240 pm take home on a Salary of £52,909 which will cost you £59,503. Add on the employer pension of £3,522 and you get £63,025 (ie 12% more).

D. £4,000 pm take home last year was based on a Salary then of £67,771, which cost you £79,585 incl pension. That salary now needs to increase to £4,320 pm take home on a Salary of £75,746 which will cost you £85,777. Add on the employer pension of £3,522 and you get £89,200 (ie 12% more).

E. £5,000 pm take home last year was based on a Salary then of £88,461, which cost you £103,131 incl pension. That salary now needs to increase to £5,400 pm take home on a Salary of £98,583 which will cost you £112,051. Add on the employer pension of £3,522 and you get £115,573 (ie 12% more).

Note: These figures assume a fully employer funded pension (no employee contributions) of 8% Qualified Earnings (band between £6,240-£50,270 a year). We assume no student loans or other mandatory deductions. It assumes no other remuneration (dividends, perks, bonuses, loans, extra leave) and no increments for productivity/long service. It assumes that inflation will be suffered equally across all earnings bands.
As you can see the problem with trying to protect a worker's real income is that the tax and pension systems are multiplying up the costs on the business.  The key increases are:

• the large uncapped 15% Employer NI cost on increased earnings.
• the effect of pensions deductions applied on increased earnings but with unamended thresholds.

All this means that employers are faced with an series of invidious choices:

• Allow staff wages to fall in value relative to inflation (perhaps finding other benefits which do not involve cash);
• Explain to staff that part of their pay rise has been eaten up by increased pension payments that are intended for their own benefit;
• Release some staff to allow the others to get a pay rise;
• Put up pay and sacrifice overall profitability or investment; and
• Put customer prices up beyond the 8% CPI inflation rate to afford both the inflation and the tax.

Unfortunately as inflation is set to hit again next year, this problem is not going away.

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