The impact of a surging inflation rate on expected salary increases.

The UK inflation rate increased to 4.2% in October, the highest rate in almost 10 years, driven primarily by the demand for oil and gas pushing energy prices up, supply problems caused by a shortage of goods, and government aid during the COVID-19 pandemic. But how is this likely to affect people, and are expected salary increases going to be sufficient to prevent a decrease in the real value of pay?

The real value of pay is its face value adjusted for inflation. For an increase in salary to be considered a rise in real terms, the increase should be greater than that of the inflation rate.

Based on CIPD’s 2021 Labour Market Outlook Report of over 1,000 employers, over 84% of employers are planning a pay review in the period to September 2022. The graph below shows that among these employers, around 39% expect basic pay to increase, 11% expect a pay freeze and just 1% expect a decrease.

The graph below shows the likely pay movements for each sector. The private sector is likely to see the highest increase in base salary with a median expected rise of 2.5%. Meanwhile, the public sector is expecting the lowest increase at 1%. This means that even at the upper end of pay increases, it is likely that the impact of inflation will leave employees worse-off in real terms.

So, what can companies do to mitigate the effects of inflation whilst retaining as much of their cash reserve as possible? One way is by paying in shares. This means that instead of companies paying directly with cash, they can level out the imbalance by awarding shares through share plans and other similar schemes. For example, in a Share Incentive Plan (SIP), free shares up to £3,600 can be awarded to employees each tax year, with no performance conditions applied. The shares are held for between 3 and 5 years but employees can choose to leave their shares in for longer to continue to benefit from tax advantages. No capital gains tax is charged on when shares are withdrawn from the SIP but if shares are not sold immediately, there may be a CGT charge on a subsequent sale. After shares have been held in the plan for 5 years, there is no income tax liability.

For more information, please contact George Edwards.

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