One-off bonuses: are they the best way to support people through the cost-of-living crisis?

CIPD Voice On… cost-of-living bonuses, by Charles Cotton, CIPD's Senior Advisor, Performance and Reward. 

Against a backdrop of soaring inflation, a number of UK employers are generously topping up pay packets with a cost-of-living payment. The CIPD’s summer Labour Market Outlook for 2022 finds that 15% of organisations have paid, or are planning to pay, such a payment to some or all their workers, while a further 15% have the matter under review. Private sector firms are most likely to have paid this bonus (18%) - especially those in the primary and utilities (30%), financial service (26%), and construction (25%) sectors.

At face value, employees will surely welcome this gesture. But for some low-wage employees in receipt of Universal Credit or Tax Credits, a one-off or lump sum bonus could interfere with their benefits payments and leave them struggling to budget and make ends meet.

To make sure your well-intended generosity doesn’t inadvertently cause extra undue stress or financial hardship, it’s worth considering what other options you could offer your workforce. People professionals in the CIPD Community have been discussing various options, including offering gift vouchers in lieu of cash payments (although even this comes with tax implications), giving a cost-of-living pay rise, or spreading a one-off payment over several months so that it acts like a temporary pay rise.

Speak to your people to find out what’s best for your workforce

As an employer, you may not know whether or not members of your workforce receive social security benefits. Even if you do, you’re unlikely to be privy to the personal circumstances that determine if or how a one-off bonus could impact them. And those employees impacted may not appreciate being singled out for special treatment anyway.

So how can you be sure to do what’s best for your workforce?

Talk to your people (through focus groups and anonymous surveys, for example) to understand what kind of support they’d find most helpful. You could then consider a suite of options you can offer to all employees, and signpost them to the information they’ll need to make an informed decision as to what’s best for them.

Where relevant, speak to trade unions for additional advice and guidance.

Incremental payments could be a better option for Universal Credit claimants – but beware the potential pitfalls

For those on Universal Credit, it’s generally better overall to receive earnings spread out over multiple months rather than as a lump sum. But not everyone in receipt of Universal Credit or Tax Credits will be impacted by a one-off bonus in the same way. When it comes to Universal Credit, the taper rate and the Work Allowance threshold come into play and could impact benefits payments in the months following receipt of a one-off bonus. As for Tax Credits, a one-off bonus could impact a household’s finalised award for the tax year in which they receive the one-off payment.

A spread payment could help ensure that those currently earning under the Work Allowance receive more Universal Credit in total over the year (since the Work Allowance won’t be ‘wasted’). And for those near the edge of eligibility for Universal Credit, a spread payment is less likely to take them out of eligibility than a one-off bonus.

It could be tricky for an employee who receives Universal Credit to make an informed estimate of whether they’d remain within the Work Allowance or eligibility once they receive a one-off lump sum, as their Universal Credit claim will be at the household level. This could also interact with, for example, their partner’s hours in a given assessment period. HR teams can signpost employees to Citizens Advice* for advice on how the different bonus options on offer from their employer could impact their household benefit payments.

What are the potential downsides of incremental payments?

It’s important to consider what happens if a member of staff leaves the organisation – can you guarantee that this person will still receive the full bonus amount even if they’ve opted for the incremental rather than lump sum option? You might also need to consider how a bonus paid in instalments interacts with someone on variable working hours.

Cost-of-living payments are not the only way employers can support financial wellbeing

Boosting people’s incomes is perhaps the most obvious way in which employers can support financial wellbeing, and will likely have the most immediate impact. But don’t forget that employers’ role in protecting people from poverty or financial distress is not just about what you pay people.

It’s also worth considering what you can do to make your benefits package work harder for those that are struggling to make ends meet, and what financial wellbeing support and guidance you can direct people to. For example, although universal credit claimants will automatically receive an additional cost-of-living payment from the Government, billions of pounds in state benefits go unclaimed every year. By helping low-waged workers claim the state benefits to which they are entitled, HR teams can help them deal with the cost of living.

It’s also encouraging to see some people professionals in the CIPD Community taking a longer-term view by supporting in-work progression as a means of increasing people’s future earning potential.

*Make sure you direct employees to the most relevant Citizens Advice site for them: Citizens Advice England, Citizens Advice Scotland, Citizens Advice Northern Ireland or Citizens Advice Wales.

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  • Great to see the recommendation to work with Citizens Advice.  It would be great if more CIPD members could volunteer with the local Citizens Advice.  The local bureaus are unsurprisingly having many more queries and help from HR professionals would be much appreciated.

  • Great to see the recommendation to work with Citizens Advice.  It would be great if more CIPD members could volunteer with the local Citizens Advice.  The local bureaus are unsurprisingly having many more queries and help from HR professionals would be much appreciated.

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