Inflation pay rises: how to manage conversations and set a strategy

We share tips for managing inflation pay rise requests, setting a strategy to approach regular inflation pay rises, your HMRC obligations, and more.

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For most employees, there will come a time when they decide to speak to their employer about pay. It is then up to the employer to decide how to respond and compensate individuals on their payroll.

The rising cost of living has been prevalent in pay rise conversations, as costs for basic things like food and energy have soared. This has meant many households require more money to supplement these higher costs, which can lead to pay rise requests.

This article will explore inflation and pay rises, including what employers should consider when deciding on inflation pay rises, and how employees may approach their employer about receiving one.

What is inflation and the cost of living?

Inflation is a term used to describe rising prices. It measures how much more expensive a certain set of goods and services has become over a specific period – mostly commonly, a year.

Inflation is always prevalent in the news when the latest figures are announced because it impacts consumers and businesses – for example, inflation going up means consumers will likely be paying more for their usual food shop. For businesses, it can drive up operational costs that could impact profit.

The cost of living is the cost of maintaining a certain standard of living. This is relevant in a conversation about inflation because if the cost of everyday items goes up, so too does the cost of living. This means that if a person’s income remains the same, their money doesn’t go as far as it once did and they may struggle to maintain the same standard of living.

When can employees ask for an inflation pay rise?

If inflation is high and the cost of living increases, it is likely that employees on your payroll could ask for a pay rise – an increase in their regular pay. Employees are entitled to ask for a pay rise whenever they see fit.

There is no law on giving a pay rise at all, even when an employee asks for one in line with inflation. Some employers offer an inflation-linked pay rise once a year in line with the cost of living – but there is no obligation for any business to do so. If employers do want to provide pay rises in line with inflation, they can do this more often than annually if they see fit.

As an employer, it’s up to you whether to accept or decline such requests, but it’s important to consider that employee morale may dip or they could look for a new job if you cannot provide a pay rise.

How do employees ask for an inflation pay rise?

You might be wondering how employees are likely to approach you for inflation pay rises. It’s a good idea to create a set procedure for pay rise requests so every employee is treated the same way.

Ensure that the process is accessible for all, and even include details of it in contracts for employees to have guidance on what to expect. Most people have asked for a pay rise at some point in their life – remember, it can be a daunting experience, so be mindful of treating every request with respect and consideration.

Some employers ask that employees provide a written request for a pay rise. If this approach fits your business model, here are some points you could ask the request to include:

  • Why are you asking for a pay rise?
  • Can you provide evidence to support these reasons (such as inflation rates vs. your recent salary changes, as well as any achievements or progression in your responsibilities)?
  • Do you have a figure in mind?

These pointers can help guide the conversation and ensure every party is on the same page.

How do I decide whether to provide inflation pay rises?

To work out whether you should offer inflation pay rises, start by looking at your business’ financial situation – can you afford it? If no, you aren’t obliged to share this information with your employees, but they may appreciate the transparency if they’ve been calling for inflation pay rises.

If you can’t afford to provide inflation pay rises, you could offer employees alternative benefits, like staff training or flexible working if applicable – the latter could help them save money with reduced commuting, or travelling to and from work outside of peak hours.

If you can afford to give a pay rise, you should now consider whether you want to provide it.

Inflation-related pay rises may be less about each individual’s performance and more about the implications it has for the business. If you can afford it, you might choose to do it because it boosts morale and shows employees that you care about their financial wellbeing, fostering more loyalty and contributing to a positive reputation as an employer.

However, just because you do it this year, doesn’t mean you’re obliged to do it again in future – but be wary that doing it may give your employees the expectation of more inflation-linked pay rises in future.

When it comes to inflation pay rises, it’s a good idea to have an inflation-specific pay review strategy in place that informs when you provide them, and who to. For example, you could choose to:

  • Give an inflation pay rise of the same value to everyone
  • Only give inflation pay rises to those who earn below a certain amount (as they will be impacted more severely by inflation)
  • Only give inflation pay rises to those who are performing well, creating an incentive for those who are underperforming to improve – just be sure to have a clear and fair process for measuring performance in place
  • Never give inflation pay rises, only giving pay rises based on performance, promotions, and progression
How much should an inflation pay rise be?

If you are looking to offer a pay rise only in line with inflation, look at the most recent inflation rates published by the Office for National Statistics (ONS). In March 2024, for example, inflation was at 3.4%.

However, it’s important to remember that you are not obliged by law to provide a pay rise of this value – or at all if you see fit. Not every business will be able to afford annual pay rises that are in line with inflation or otherwise.

How do I decline an individual pay rise request?

It’s no secret that an employee is going to be disappointed or even angry if a pay rise request is declined. This is human nature, but it’s your role as the employer to navigate the situation in a calm and professional manner.

Explain the reasons behind your decision and discuss how you can help them secure a pay rise in the future. It’s best to have this conversation face-to-face or, if applicable, via a video call, rather than sending an email.

If the employee needs to improve their performance, set clear targets for them to meet and a timeframe for when you can revisit the conversation.

Remember, you are not obliged to provide a pay rise of any sort at any time – even when the request is to reflect inflation rates.

How do I accept an individual pay rise request?

As an employer, it’s always nice to be able to deliver positive news to employees – and an accepted pay rise request fits this bill.

If possible, share the good news face-to-face – this also gives you the opportunity to praise the employee in the areas that you believe qualified them for the pay rise. This is great for morale and building employer-employee relationships.

Always follow up a verbal conversation with written confirmation via email, detailing the pay rise amount and when it will be effective from. Remember to issue an updated contract to reflect this raise, too.

Employees are usually very happy to be informed of a pay rise – a scenario where this may not be the case is if the pay rise is lower than they anticipated, for example, if you can’t match the rate of inflation. If this happens, use the pointers above to explain your reasoning.

How do my HMRC obligations change?

Your HMRC obligations won’t increase when you provide an employee with a pay rise, but there will be some small changes to the details you provide in your real-time information (RTI) submissions.

In your Full Payment Submission (FPS) – the monthly report every employer must send to HMRC detailing payments made to employees and any deductions, such as National Insurance – remember to change the sum paid to your employee after the pay rise comes into effect.

This can be achieved by updating your payroll software or informing your third party agency or payroll service provider.

Be mindful that providing a pay rise may mean that an employee’s tax obligations increase. Check out our detailed guide to UK tax brackets for more information on this.

Final thoughts

In a difficult economic climate caused by high inflation and interest rates, it can be tricky to navigate employee pay rise requests. Remember, you aren’t obliged to accept inflation pay rise requests, but it can be great for employee morale to offer pay rises to deserving team members if you are able to. Ideally, you should look to put a strategy in place that consistently determines who receives inflation pay rises, and how often.

Mid shot of Kirstie Pickering freelance journalist.
Kirstie Pickering - business journalist

Kirstie is a freelance journalist writing in the tech, startup and business spaces for publications including Sifted, TNW, UKTN, The Business Magazine and Maddyness UK. She also works closely with agencies such as CEW Communications to develop content for their startup and scaleup clients.

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