Whenever you have to give bad news to an employee, it is important to get the point across clearly and concisely. They need to understand that you cannot give them what they want, but you also have to make sure they aren't disgruntled by the news. Knowing the proper way to tell an employee bad news is a good skill to master, and a perfect example of this is when you have to decline a salary increase.
Start out positive. Tell the employee early on in the letter that you appreciate the work he does and maybe even list some specifics you like about his work.
Keep a firm tone of voice in the letter. Tell the employee concisely that they will not be receiving a salary increase, just don't belabor the point. He needs to know, but he doesn't want it thrown in his face.
Point out any way that he could be able to remedy the scenario if there is one. Include more positives at this point in the letter, and let him know if he could earn his raise.
Close out the letter positively. Make sure the employee knows that you want to continue working with him and you appreciate what he does.
Also, give bad news on a Friday so they have the weekend to cool off before coming back to work.
Make sure not to be to harsh in the letter.