Pay and pensions

While you are broadly free to offer the pay you think necessary to attract and motivate employees, the law requires that you pay at least the minimum wage and that you offer equal pay for work of equal value. You must also honour employees’ entitlements to statutory sick pay and to maternity, paternity or adoption pay.

The minimum wage applies to almost all workers, but not to those who are genuinely self-employed. Reduced minimum wage rates apply to workers who are 21 years old or younger.

You can only make deductions from employees’ pay that have been agreed in advance (for example, as part of their employment contract) or that you are legally required to deduct (for example, PAYE tax and National Insurance contributions). You are legally required to give all employees an itemised pay statement.  

Employee share schemes

Employee share option and share schemes can help to align the interests of employees and shareholders, by giving employees a direct interest in the financial performance of the company. Smaller businesses and start-ups can use share schemes to attract and reward high calibre staff without paying unaffordable cash salaries.

Approved share schemes that meet HM Revenue & Customs (HMRC) requirements offer tax and National Insurance advantages to both employer and employee but can involve a significant administrative burden. You can also tailor your own, unapproved share scheme to meet your particular objectives but without the tax advantages.

Pensions

Providing access to a pension scheme is a legal requirement for many employers. From 2012, all employers will have to provide pension arrangements and to make contributions.

The administrative burden involved in setting up and running an occupational pension scheme is such that they tend to be offered by large employers. Smaller businesses often opt instead to provide access to personal pensions run by a pension provider.

Businesses with five or more employees that do not offer a pension contribution of at least three per cent of employees’ salaries are legally bound to provide access to a ‘stakeholder’ pension scheme. These are personal pensions that meet specified requirements – such as accepting low monthly contributions, being portable when an employee changes job, and strictly limiting the fees that the pension provider can deduct from the scheme.

Different pension schemes may be appropriate for highly paid employees, company directors and owner managers. For example, some employers offer executive pension plans (EPP) tailored to individual executives. High earners can also be offered a self-investment pension plan (SIPP) offering greater investment flexibility. For owner-managers, a small self-administered scheme (SSAS) may be an option. Schemes like this can use the pension fund to support the business: for example, through owning your commercial premises.

More on pay and pensions

• National minimum wage: 20 FAQs
• Pensions for business owners
• Remuneration
• Pensions calculator from the FSA