- The frozen tax thresholds could see some employees ‘dragged’ into paying more tax and have less disposable income as a result.
- Employers should ask employees about their financial pressures to understand how to support them.
- A salary sacrifice arrangement can support employees who are dealing with the impact of fiscal drag.
In his Autumn Statement last November, Chancellor Jeremy Hunt extended the freeze on national insurance (NI) and income tax rate thresholds until April 2028. This can contribute to fiscal drag, which occurs when taxpayers are ‘dragged’ into paying tax, or a higher tax rate.
This could add further strain to employees. Wealth at Work’s March 2024 report Many struggling to make ends meet found that 38% of workers admitted money worries affect their work performance by increasing stress levels, mental exhaustion (33%) and decreasing motivation (26%). In order to combat this, how can employers help manage employees’ financial pressures?
Impact of financial pressures
In the aftermath of the pandemic, employees’ earnings have been squeezed following soaring energy, food and housing costs. Although some employers have been able to increase wages, the frozen tax thresholds could see some workers pay more tax and have less disposable income.
Clare Stinton, head of workplace saving analysis at Hargreaves Lansdown, says: “Employees whose income exceeds £100,000 find themselves teetering on a tax cliff, where they lose £1 of their tax-free allowance for every £2 they earn over £100,000. This group also have to forfeit free childcare allowance and a halving of the savings allowance. Over time, we may see employees dragged into this threshold reducing their hours to keep their earnings below £100,000, to keep hold of valuable benefits.”
These employees will need guidance and support to understand the impact on their finances and what options are available for them, as this can negatively impact wellbeing and productivity.
Jeanette Makings, head of workplace financial wellbeing at Close Brothers Asset Management, says: “Employees will need help understanding the impact in relation to their take-home pay. As fiscal drag continues to be talked about, employees may worry more about money and the extent to which this may change their personal budgets.”
In his Spring Budget in March this year, Hunt announced that employee NI contributions will be cut by two pence, falling from 10% to 8% from 6 April. This will positively impact the net pay of the majority of employees, but might not fully offset potential tax bracket changes.
Graham James, director at Pluxee UK, says: “Employers can amplify the positive impact by communicating potential benefits, such as starting an emergency savings fund or increasing retirement contributions.”
Communicating with employees
Employers can be a lifeline for employees facing financial strain and help offset their financial pressures in a variety of ways. To understand what support is needed, employers should find out where pressures exist for employees, and review existing benefits to ensure they still meet individuals' needs.
“Benefits can help plug gaps in employees’ financial safety nets without having to put their hands into their own pockets,” says Stinton. “Understanding the value of these offerings is essential to employees achieving financial stability, having a greater awareness of effective money management, and enabling them to build habits to future proof their finances.”
Open communication is key, adds James. “Employers can create a safe space for employees to discuss their concerns with HR or designated support staff," he says. "This open dialogue allows employers to identify areas where they can provide targeted assistance.”
Improving financial education
As employers have become more aware of the impact of finances on mental and physical wellbeing, as well as productivity and absenteeism, strategies can be put in place to support with financial pressures, or be expanded upon.
Jonathan Watts-Lay, director at Wealth at Work, says: “Financial coaching programmes on debt and money management have become more mainstream and embedded.”
To help offset financial pressures, employers can offer targeted financial education, because tax can be a complex topic that is not always well understood. Financial education programmes provide information and support resources; workshops can offer examples and explanations of choices to consider in order to mitigate any increased tax implications, while financial literacy apps improve knowledge.
Employers can also offer access to one-to-one support via a financial helpline, guidance clinics and a pay and budgeting tool, so they can look at the effect on their finances through tax planning strategies, says Makings.
“These include examples of the impact at relevant salary levels, considerations for ways to mitigate the additional tax, and signposting to further support," she explains. "Personalised communications with individual calculations showing the difference these changes will make to each employee, should make clear who will be affected.”
By focusing on education and access to resources, employers can demonstrate their commitment to employee wellbeing and create a more positive work environment.
Supportive benefits
A salary sacrifice arrangement can provide a tax-efficient way for employees to manage fiscal drag. Employers that offer such arrangements enable staff to save both the income tax and national insurance on any payments into their pension or for a bikes-for-work scheme, for example.
Providing a robust financial wellbeing programme can empower employees to take action and build their financial resilience, says Stinton. “This may mean bringing in experts who can highlight tactics for reducing tax bills, as well as ways to make income stretch further, such as practical guidance on budgeting, effective debt management strategies, and tax-efficient ways to save and invest,” she says.
Meanwhile, discounts and e-vouchers on everyday purchases stretch employees’ salaries further. Employee assistance programmes can offer confidential access to financial counsellors, who provide personalised budgeting, debt management, and savings strategies.
“Salary advance schemes can also be a helpful tool, allowing employees access to a portion of their earned wages before payday," says James. "This can help bridge temporary financial gaps without resorting to high-interest loans.” offers James.
By taking a multi-pronged approach, employers can equip their workforce with the tools and resources they need to navigate financial pressures and achieve security.
