There have been some significant changes to the Government and Government policy recently – following the appointment of Rishi Sunak as Prime Minister, Jeremy Hunt has remained as the Chancellor, originally appointed by former prime minister Liz Truss.
There have been hours and hours of content focussed on this online, on TV and in print – but how do the recent government policy changes on the 14th of October impact your employees and what can you do to help? After all, a less distracted and more reassured workforce is going to bring benefits for everyone.
The cost of energy
In September, former prime minister Liz Truss explained that she would look to stop the expected price cap increase and introduce an “Energy Price Guarantee”  As a reminder, 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 announces £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. 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
So how did this change on October 14th Jeremy Hunt, the new Chancellor of the Exchequer, confirmed that rather than being in place for two years, this guarantee is now to only be in place for six months[i], after which more targeted support will be available.
This is perhaps one of the most significant changes – two years is a fairly long period when households are planning their income and expenditure – whereas six months simply gets households through the Winter. In addition, the fact that interest rates are now steadily increasing means that households across most demographics could be hit by a double whammy of increased energy costs and increased housing costs next year.
We feel that there are two aspects to consider here – one being how to help your employees plan effectively to meet this challenge (so perhaps a general financial education need), and the other being the impact of this on your employee’s mental health (so perhaps more of an employee wellbeing need).
Reduction in National Insurance
This is one area where have not seen a change – and perhaps mainly due to it already having passed through the parliamentary process and is set to take effect from 6th November 2022. 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 the rising cost of essentials like food and energy. It could take some time to see the effects of this.
In fact, we have already seen interest rate predictions increase significantly[i] following the Fiscal Event announced by Jeremy Hunt’s predecessor, Kwasi Kwarteng on 23rd September 2022. This is likely to be a big financial shock for all – people with mortgages and people renting privately are likely to see their housing costs increase significantly over the next few years (for those on fixed-rate mortgages, this may be after their fixed-rate ends).
Changes to Income Tax
Rishi Sunak, who was the Chancellor from 13th February 2020 to 5th July 2022, 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.
This is an area where we saw a significant change – that rate cut being “postponed indefinitely until economic circumstances allow for it to be cut“[ii]
There is a hope that this action (alongside others) will help focus on the issue of 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 10.1%.[iii] 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 (Monetary Policy Committee) meeting on Thursday 22nd September, they were increased to 2.25%. The next meeting is on 3rd November, and although there is still expected to be a further increase, this is expected to be a smaller increase than expected previously, due to the changes announced by the new Chancellor.[iv]
The Bank of England use this tool (interest rate rises) to increase the cost of borrowing – 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 implementation. This is because as well as saving employees money, it saves employers money too!
Inflation means that our money has to stretch further – as the “real value” of our money is eroded by increasing prices. There is now likely to be a significant change in April 2023, when the energy price guarantee changes to become more targeted (under current plans). 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.
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 free mortgage advice service, which would help many employees navigate that difficult period.
The impact of personal finances on people’s mental wellness is well known. The Money and Mental Health Policy Institute have published research which suggests that a poor financial situation will have a direct detrimental effect on an individual’s mental health, producing physical and psychological symptoms such as loss of sleep, poor concentration and reduced motivation[v]. Our new wellness consultancy service can focus on helping with areas like stress resilience and mental health first aid.