Linked to this is the delivery of the Chancellor, Kwasi Kwarteng’s “Fiscal Event” today, we focus below on the points that we feel are most relevant to the day-to-day financial well-being of employees – and what can be done to help them weather the storm.
The cost of energy
Shortly after taking office, Liz Truss, Prime Minister, explained that she would look to stop the expected price cap increase, and introduce an “Energy Price Guarantee” This effectively fixes the cost of energy for a household with typical consumption at an annual level of £2,500 over the two years from 1st October. It comes in addition to the announced £400 energy bills discount for all households. Households with higher energy usage may be required to pay more than this – and those with lower usage may pay less. This will of course help the general public, but there was initially concern that this may not help businesses.
Subsequently, there has been work carried out by Government to develop a support package, fixing wholesale gas and electricity prices for six months from 1 October. This means that energy bills for UK businesses will be cut by around half their expected level this winter.
Without this intervention for businesses, we could have seen additional inflation (due to higher operating costs for businesses), adding to already very high levels of cost.
Reduction in National Insurance
On the face of it, this reduction of 1.25% (reversing the recent increase) could be a good thing. It could result in higher take home pay for employees and employers from November – meaning that your employees are likely to have more take home pay.
There are some concerns around this though – some economists feel that a cut to tax could impact inflation, by boosting spending. This may not be the case – it could simply help employees keep up with rising cost of essentials like food and energy. It will take some time to see the effects of this.
Changes to Income Tax
Rishi Sunak, the previous Chancellor, announced that there would be a change to income tax by 2024. This would see a 1% cut – again providing people with more money to spend. Kwasi Kwarteng is to bring forward this change to 2023.
Just as with National Insurance, we will have to see what this could mean for inflation.
What are the negative issues associated with inflation, and how will they impact my employees?
We are used to hearing that 2% inflation target, and we know that inflation is generally perceived to have negative connotations.
Why is this? Simply put, higher levels of inflation mean that your employees will have less money to buy goods and services – be that essentials like food, or things that help us enjoy life like holidays, trips out, and the latest gadgets!
What is being done to address inflation?
The Bank of England are tasked with keeping inflation under control – the target level at which they are asked to keep it below is 2%. The current inflation rate reported by them is 9.9%. There are a lot of reasons for this high rate of inflation – many of them outside the Bank of England’s control.
The main tool that the Bank of England has historically used to try to reign this inflation in, is interest rates. In the MPC meeting on Thursday 22nd September, they were increased to 2.25%.
The logic behind this is that by increasing the interest rates, the cost of borrowing increases – meaning that people spend less. Theoretically, less demand should help reduce the rate of inflation.
There are arguments for and against interest rate increases amongst economists at present, but what we do know is that increases in interest rates may mean that your employees will find their borrowing increase in cost. Some of this impact might be quite delayed – some people have long fixed rates on their mortgages for example.
What can employers do to help their employees?
The good news is that there are actions that can be taken – and these actions are low or no cost. In one case, they can actually save employers money too!
- Salary exchange for pension contributions
Salary exchange is a way of making employee pension contributions, and when compared with relief at source (the way that a lot of workplace pensions and personal pensions see contributions made), results in lower National Insurance contributions. Any employees who can make contributions in this way and don’t should be reminded of this option. If as an employer, you do not offer this, it could be a good time to consider an implementation. This is because as well as saving employees money, it saves employers money too!
- Financial education
Inflation means that our money has to stretch further – as the “real value” of our money is eroded by increasing prices. Effective, simple financial education to help here is vital – especially seeing as anyone entering the workforce after June 1992 has not experienced annual inflation above 5% before.
- Mortgage help
It is perhaps unsurprising that 83.1% of existing mortgage holders are on fixed-rate contracts. This means that many see interest rate rises as something which won’t impact them for a while. It is perhaps worth highlighting then that 32.7% of that group are on short agreements of 24 months or less. Many people don’t know that you can “lock in” to a new fixed rate 6 months before the fixed rate ends – avoiding being on a standard variable rate altogether. For our corporate clients, we could put in place a mortgage service, which would help many employees navigate that difficult period.