28th July 2022Cost of living crisis: 3 alternative options to a pay rise

Cost of living crisis: 3 alternative options to a pay rise

Rising inflation in the UK is creating a situation in which the cost of everyday essentials from groceries and household bills is rising higher than average household incomes. The Government continues to announce a number of measures designed to tackle this. For example, from 6 July 2022 the starting threshold for Class 1 National Insurance Contributions was raised to £12,570 an increase of £2,690 over the 6 April threshold of £9,880.

The Government estimate that 2 million people will pay no NI at all and 30 million will see a decrease in their contributions with an average saving per person estimated to be around £297.

However, this must be considered alongside the increase of 1.25% to the rate of National Insurance which came into effect on 6 April 2022 (for both employees and employers) together with the soaring cost of living and high predicted inflation rate.

Many people will be feeling the pinch and may be looking to their employer to help. However, costs are also rising for employers, and they may not be able to afford to give pay rises at a sufficient level to make a significant difference to the take-home pay of their employees. In this article, we explore some alternative options…

Share based arrangements

There are a number of potential share based arrangements which could be considered by employers.

Enterprise Management Incentives (EMI)

Employees are granted options to acquire shares at a point in the future (such as a sale of the company) at a price which is based on the market value of the shares when the options are granted.  Provided the employee pays at least that price to acquire the shares when the options are exercised, there are no income tax or national insurance charges on exercise and any increase in value is chargeable to capital gains tax rather than income tax when the shares are disposed of (potentially at a 10% rate).

From the employee’s perspective they are gaining a stake in the company and can acquire shares at a low price with a cash flow advantage in that they only pay for the shares when the options are exercised.  If the options are granted on the occasion of a sale of the company, the employee will have the funds to pay for the shares plus any increase in value.  If the value of the shares decreases, the employee would not exercise the option.

From the employer’s perspective, they are providing an incentive to the employees with no immediate dilution of voting power or control and the company also benefits from a corporation tax deduction when the options are exercised.

There are other share option arrangements available which might be more suitable for larger companies.

Phantom share scheme

This is a cash bonus scheme, but the payment is linked to the value of the company’s shares.  The employee only gets the bonus if the value of the company grows and the employer has a cash flow advantage.

Salary Sacrifice arrangements.

This is an agreement to reduce an employee’s entitlement to pay, generally in exchange for a non-cash benefit, for example pension contributions.  The employee is taxed on less salary (and pays lower national insurance contributions) and the employer should save on national insurance contributions.  The employer might agree to share their NI savings with the employee as a sweetener.

To discuss individual circumstances, please get in touch.


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