Cost of living payments – things you need to consider

Jan 16, 2023 | Good Management

Something many employers are considering as part of their reward strategy during the current financial climate is a cost of living bonus – a one-off payment made to help employee with their increased costs. This can be a really good option especially during the winter months when fuel bills are high and many are struggling. It adds an injection of cash when most needed, and also doesn’t commit the business to increased pay on an ongoing basis.

But there are some things a business needs to consider before making cost of living payments.

Drawing a line – who to include       

Some employers choose to pay the bonus to everyone across the organisation, on the basis that regardless of income, everyone’s costs are rising. Another option is to draw the line somewhere, and exclude some people from the payment. A tip here is to avoid drawing a line that involves people getting very close to it and just missing out.  A clear gap is best, to avoid disgruntled employees.

Often seniority level is used, with perhaps senior management being excluded. If this enables you to offer a little more to lower-paid employees it sends a good message about priorities. Some employers choose to select a salary level and pay it to everyone below that, sometimes only to very low-paid staff. This is fine, however do be careful that the line you draw doesn’t result in resentment.

Choosing an amount – fixed or variable

Many employers pay the same amount across the board. It feels fair, and is easy to administer. But there are other options. You could make a higher payment to those on lower salaries, either on a sliding scale or based on percentages. That might enable you to direct the impact as far as possible where it is most needed, however it does represent a more significant administrative burden,

Impact on benefits

If you have employees in receipt of state benefits, a relatively large one-off payment could impact those, meaning there is no net benefits to them, and in fact increased stress as they deal with their income being cut at a later date. Do make sure employees feel they can come to you with these concerns, and do what you can to address them. Paying in small instalments may enable them to keep the money, for example, or doing it in the form of vouchers might be another option.

Family leave and other absence

Don’t forget those on maternity leave, sick leave or other absences. Employees on maternity leave or other family leave should be paid this amount in full. It’s not part of normal remuneration (which could therefore be pro rated like a performance-related bonus), and should be paid in full to avoid discrimination claims.

Those on long term sickness absence should also receive the amount. Apart from anything else, unless they are on generous sick pay, they are likely to be suffering even more than their colleagues from cost increases. In addition, long term absentees are more likely to have a disability therefore also a possibility of a discrimination claim if excluded.

Employees on sabbaticals or career breaks could reasonably be excluded from cost of living bonuses if you choose to do that.

Part timers

Obviously salaries for part timers are pro rated to reflect their reduced working hours, and benefits can be pro rated similarly. However, although you could defend a decision to pay part timers only a proportion of a one-off cost of living bonus, it is sensible to consider including them at the same level as anyone else. They may only be able to work part time because of childcare or other caring responsibilities, and are unlikely to be better-off than their full time colleagues.

Tax implications

A cost of living bonus will be taxable as other income is, which means that a chunk of it will get swallowed up, particularly for those on a higher tax code. One option for dealing with this is ‘grossing up’ the amount, ie paying the tax differential on employees’ behalf.

This does increase the impact for your workers, but also increases both costs and administrative burden for you. Grossing up is also likely to make most difference to higher paid staff, who are unlikely to be the ones you are most keen to help, so keeping it simple and leaving the bonus as normal taxable income might be a better bet.


If you’d like to offer a one off cost of living payment to your team and would like some help in identifying how best to do this in your business, do get in touch.