When times are tough, it is a dilemma that many people will be faced with. Do I take a pay cut in order to help the company survive and protect jobs or do I look out for number one? We answer the questions that will help you decide.
Do I have to take a pay cut?
In short, no. Your boss cannot force you to take a pay cut, as it can only be done with your agreement. The decision is entirely yours, even if all of your colleagues agree, you can still refuse.
Should I take a pay cut?
Again, this is entirely your decision. Your reaction will be guided by your own circumstances and the reasons behind the proposed cut. If the business is in trouble, will taking a pay cut help, or are you likely to lose your job anyway, later on? On the other hand, if taking a pay cut for a short time would protect other people’s jobs and even help safeguard the future of the company, then these are issues that most people would consider before making a decision.
Your decision is likely to come down to a matter of principle, but there are a wide range of implications to consider and clarify before making a final decision. They include:
1. How long is the cut for?
In most cases, employers ask their staff to take a pay cut for a limited period of time, typically six months (or a year at most). You need to be very clear that, if you do accept a pay cut, it is for a limited period, and get it agreed in writing.
2. What if redundancy follows later?
This is another issue that must be considered very carefully, since redundancy payments are usually based on salary. Make sure that, even if you do take a pay cut for a limited period, your redundancy terms are based on your original salary. Again, get it in writing.
3. What is the impact on benefits, such as the Child Tax Credit?
It is quite common for employers to suggest a reduction in working hours, as well as a pay cut. This can cause a problem for families claiming tax benefits such as the Child Tax Credit or the Working Family Tax Credit. Essentially, if your weekly working hours fall below 30 (for single people/childless couples) or 16 (parents and disabled workers), your entitlement might come to an end or be reduced – leaving you with even less money.
First of all, it is important that you understand what impact a reduction in working hours might have on your benefits, before you agree to it – but it is also very important that you tell the HM Revenue & Customs immediately as and when your hours go down (or up). Otherwise you are likely to be faced with an administrative nightmare, dealing with one of the most convoluted parts of the benefits system.
4. What about income protection, should I reduce my cover?
If you've been asked to take a pay cut reducing the level of income protection cover you have in place is unlikely to be a wise move. The money you would save would be minimal, but the change would probably be quite complicated.
First of all, you would probably be asked to take out a new policy, rather than amend an existing one, which may usher in a three month period when you are not covered (a fairly standard clause in income protection insurance). Secondly, the insurer could use the fact that you have taken a pay cut as evidence that the company was in trouble before you took out the new policy and refuse to pay out on any claim if you do lose your job.
5. What about my mortgage
Provided you are able to afford the repayments, any existing mortgage should not be affected. However, if you want to take out a new mortgage, or remortgage an existing debt, after you agree to a pay cut, the amount you can borrow will be affected. Remember that most mortgage offers remain valid for at least three months, once agreed with the lender...
6. Can I take on other work to make up the shortfall after a pay cut?
This will depend on your employer, as you will have to ask for permission. Most employment contracts set out the need to gain permission before taking on other work and, under the Working Time Directive, your employer has a duty to monitor all the hours their employees work, for health & safety reasons. In most cases, however, employers will agree – unless you propose to work for a competitor or work in a senior or sensitive position.
7. How are pensions affected?
You should not overlook the impact of a pay cut on your pension, and never agree to a pay cut before any possible implications for your pension are safeguarded against. Thankfully, any possible problems can be easily ironed out.
The main issue is with final salary schemes, which pay out a pension based on your salary at the time you retire or leave the business (or an average of your salary over the final three years of your employment). Clearly, if you take a pay cut and then leave the business or retire, your pension will be lower. Similarly, if you are part of a pension scheme whereby you and your employer each pay an agreed percentage of your salary into a pension fund, a lower salary will have an effect here too.
Before committing to a pay cut, you should insist that any pension contributions remain tied to your previous, full salary.
Your pay cut checklist:
- Remember, by law you can’t be forced to take a pay cut
- Know your rights and don’t allow yourself to be pressured
- Find out why a pay cut is needed and what difference it will make to the business
- Negotiate before making a commitment
- Only ever agree to a pay cut for a limited period
- Make sure your redundancy terms would not be affect by the cut
- Investigate the impact on any benefits you receive and only agree to a cut in hours if you would not lose out on benefits
- If you need to remortgage, get it done before accepting a pay cut, but be careful to ensure you’ll be able to afford the repayments
- If you want to find more work, to make up the shortfall, get permission from your employer first
- Make sure your pension would not be affected
- GET EVERYTHING YOU AGREE IN WRITING
