COMPLIANCE
cost over two separate points in time, usually a year. Since 2013, the Office for NationalStatistics has used a variation on CPI rather than the previously used RPI (retail price index) due to the RPI’s variability in turbulent times. The main tool the BoE uses to keep inflation in the 2% area is the bank rates previously mentioned. By changing the bank rate, it can attempt to control the effects of inflation. "As costs go up for general living expenses, staff will require more money – this subsequently factors heavily into your recruitment and retention strategy" Simply put, lower interest rates encourage borrowing and therefore spending, and can increase inflation. Higher interest rates encourage saving and less spending. When saving is encouraged, it hopefully leads to less spending, so prices are held or reduced as people usually have less disposable income during a time of high inflation. Since 2009, until recently, CPI has been sometimes higher than 2%, sometimes lower than this, but stable enough that the BoE could keep the bank rate down at 1% or less. These low rates were out of the norm, with the bank rate going even as high as 17% in 1979. Prior to this, the bank rate had never dipped below 2%. Since late 2021, inflation has skyrocketed to unprecedented levels. Usually, inflation is caused by a booming economy, where disposable income is plenty, and businesses react by increasing prices. However, this time around this doesn’t appear to be the case. Reactions to several varying and impactful events have caused shocks to the pricing of many essential commodities. Food and fuel have been impacted significantly and continue to ensure that ‘cost-of-living’ will remain in our headlines for at least the near future. Recently, inflation figures have been falling. Amazing, right? Well, let me just stop for a second and dispel an often-
seen misunderstanding: falling inflation figures don’t mean prices are falling, just rising slower. If I take a base line figure from two years ago, which then increased by 10% last year and 5% this year, then the price is still 15.5% higher than two years prior despite inflation halving this year. For prices to fall would require deflation, an actual reduction in the cost of goods, and for many, this doesn’t signify a strong economy. So, what specifically do we need to consider as payroll professionals? The first, and most obvious, is the impact this has on wage expectations. As costs go up for general living expenses, staff will require more money – this subsequently factors heavily into your recruitment and retention strategy. The pressure for many organisations to keep up with inflation when it comes to pay rewards has been phenomenal. Many businesses have been seen to give cost of living bonuses instead. This is a method which doesn’t tie them into yearly compounding growth as would happen with a pay award. But, if the expectation from new hires isn’t met, this can cause significant issues around getting new talent into a business. If you needed any more reasons to keep HM Revenue and Customs (HMRC) on your good side, the next point has you covered. Late payment interest rates are something no one wants to deal with, but you may have to face them at some point. The fines for late payment increase in line with the bank rate, being 2.5% plus the base rate. Currently, that’s 5.25% plus 2.5% for a total of 7.75%! Probably easier to pay your tax bill on time if you can. Conversely, the repayment interest rate you’ll get if HMRC owes you money is set at the bank rate minus 1%, currently 4.25%. HMRC assures us this is “in line with the policy of other tax authorities worldwide” and “compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits.” Finally, there are some figures linked to inflation figures. Most notably, the state pension, but universal credit (UC) and statutory absence payments (statutory sick pay, statutory maternity pay, statutory paternity pay, etc..) are usually linked, albeit on a discretionary basis.
The ‘triple lock’ for state pension promises to increase the payment by whichever is highest from: l CPI inflation from September l average wage growth in the UK, or l 2.5%. "We’re still in a rather turbulent time economically and so keeping a passing eye on the goings on with inflation will help you and your organisation deal with its impacts as vigilantly as possible" While not specifically something payroll professionals need to engage with, this can help individuals to plan for retirement and start to understand their pension savings. UC can have a huge impact on labour markets and how the lower paid engage with work. We already know changes to hours or mistimed payments can impact the amount of UC received by individuals on low hours and pay, and we should be mindful of those impacts. Uprating the amount received only further exacerbates the issue and frustration when things go wrong. Statutory absence payments are something employers and payroll professionals need to have a good understanding of. When uprated, a large increase to statutory sick pay could mean a lot of money for larger employers as this cannot be claimed back from the government, unlike other statutory payments. It’s always worth keeping ahead of and understanding the impacts of this for budgeting and staffing purposes, and your finance department may just thank you for giving them a heads up. As you can see, inflation has some far-reaching impacts beyond the price of your ‘big shop’. It’s complex and can feel quite ethereal, as there’s little we can do on an individual level to affect it. We’re still in a rather turbulent time economically and so keeping a passing eye on the goings on with inflation will help you and your organisation deal with its impacts as vigilantly as possible. n
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| Professional in Payroll, Pensions and Reward |
Issue 95 | November 2023
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