Your employees might be working and living in a place where the cost of living (COL) is higher than it is elsewhere in the UK. If so, you might find it appropriate to introduce a cost of living pay rise for these employees. Staff might ask for a pay rise if they are living and working in a high COL area to build their savings or simply to pay for basic expenses. Read on to find out how you can set wages or base salaries in a high COL area.
Why is assesing wages for cost of living pay rise important?
Understanding the cost of living involves comparing expenses of living and working in one area (such as a city, town or country) to being based in another. The COL in cities in the UK is generally higher compared to towns or villages and salaries often reflect this. Also, some cities in the UK have a much lower COL than London.
Indeed’s Career Explorer can help you find out what the average base salary is for employees in different parts of the UK. A data analyst in London earns an average of £40,741 a year, with the boroughs offering the highest salaries including Bromley, Canary Wharf, Holborn and Greenwich. In Manchester, however, a data analyst earns £33,246 a year on average. This is because in both of these cities, the average base salary corresponds to the COL.
Therefore, you might find it suitable to implement a cost of living pay rise so that your employees can afford to live close to where they work. Basing salary on the COL of where your employees live and work can be attractive to prospective employees – drawing in candidates from the local area – and improve employee retention.
How can I work out what the COL is for my area?
To work out the COL for your area, you have to consider which expenses your employees will need to factor into their day-to-day living. Cost of living, therefore, includes factors such as:
Employers are required by law to pay the National Living Wage (NLW) to all employees aged over 23. As of April 2022, the current rate for this is £9.50 per hour.
Before making a cost of living adjustment, it is a good idea to first look at the COL index for your employees. You can do this by using the cost of living database Numbeo, which gives the average cost of rent for a family and a single person every month, alongside price ranges for other expenses such as travel, clothes and utilities. It also allows you to compare the COL between different cities, towns or counties within the UK.
How do I decide what my employee’s wage or salary should be in a high COL area?
You might want to set an employee’s base pay in line with the cost of living in their area. Base pay is any payment that your employee receives before additional benefits, such as commission, overtime or bonuses. You might offer an employee this based on an hourly, weekly, monthly or annual rate. As mentioned previously, you can also look at the Indeed Career Explorer for an indication of how much employees in a particular job are paid on average by area.
To set wages or base salary for a high COL area, consider calculating the average cost of expenses for your employees every month, factoring in rent, bills and other costs. This will be particularly high in London, where according to the ONS in 2020, 38% of a Londoner’s salary on average went towards their rent.
If an employee’s current pay does not easily cover the costs of these expenses, they may ask for a pay rise. In the event that a high COL area becomes more expensive to live in, you might deem it appropriate to also implement an increase in employee overtime rates as part of a cost of living rise.
London Living Wage
As London is a high COL area, many employers choose to pay their employees the London Living Wage. The London Living Wage is set at £11.50 per hour and covers all the boroughs included in Greater London.
Businesses do not have to pay the London Living Wage by law, but doing so may make themselves more attractive to prospective new recruits. This is because it helps to cover the more basic expenses of living in London.
The Resolution Foundation calculates the Living Wage on an annual basis, and the process is overseen by the Living Wage Commission. This is based on living standards across the UK and in London. The Resolution Foundation looks primarily at rent costs for its calculation, but also considers other costs such as childcare, travel, household bills and food.
Cost of living adjustments
You might also want to offer a cost of living pay rise if the cost of living has increased in your area. You can award this pay rise to an employee’s overall income, which can include their base salary and other employee benefits. Market rates are constantly changing, so it is a good idea to continuously research them, to make sure that you are awarding pay rises in keeping with this.
According to the ONS, the UK cost of living has been on the rise since early 2021. The organisation states that by April 2022, consumer prices were 9% higher than they were at the same time the previous year. You might therefore want to refer to the UK’s consumer price index to decide how much of a pay rise to offer your employees. To compensate for the UK’s current inflation rate, the UK Government increased the National Minimum and Living Wage on 1 April 2022, amounting to a £1,000 pay rise for full-time workers.
As shown in a study by the CIPD, in 2022 almost half of employers have vacancies that are difficult to fill and have compensated for this by increasing wages for new recruits. Therefore, it’s worth considering a wage increase as part of your employee recruitment and retention strategy, especially for employees in high COL areas.
You can also help employees compensate for a high COL area by offering perks such as free travel, food vouchers and free entertainment tickets. Alongside a pay rise, perks can help increase employee retention rates.
What if my employees are working remotely or across the UK?
Some of your employees may work remotely – either full time or on a hybrid basis. You might choose to award a pay rise to compensate for the cost of living where that employee currently resides, on a case-by-case basis.
If you have offices across the UK, then you might want to offer different cost of living adjustments depending on the cost of living for each area. For instance, you might offer a higher pay increase to employees working in your London office, as opposed to employees working in Birmingham, where the cost of living is lower.
