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Pay and pensions

While you are broadly free to offer the pay you think necessary to attract and motivate employees, by law you must pay at least the National Minimum Wage (NMW) and equal pay for work of equal value. You must also honour employees’ entitlements to statutory sick pay and maternity, paternity or adoption pay.

The NMW applies to almost all workers, but not to those who are self-employed. There are four rates of NMW (including a rate specifically for apprentices). The rate of NMW payable will depend primarily on the age of the employee.

You can only make deductions from employees’ pay that have been agreed in advance (eg as part of their employment contract) or that you are legally required to deduct (eg PAYE tax and National Insurance contributions). You are legally required to give all employees a detailed pay slip.  

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 having to pay salaries the business cannot afford.

Approved share schemes that meet HM Revenue & Customs (HMRC) requirements offer tax and National Insurance advantages to both employer and employee, but they 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.

The Government has introduced a new form of employment contract where employee-shareholders are given shares in the company for which they work worth between £2,000 and £50,000. In exchange for these shares, the employee is required to give up some of their employment rights. Find out if employee-shareholder contracts are right for your business.

Pensions

Pension reforms are requiring all businesses to automatically enrol eligible employees into a suitable qualifying pension scheme (unless those employees chose actively to ‘opt out’). Employers are required to pay a minimum employer contribution (based on the employee’s ‘qualifying earnings’) and collect and pay employee contributions. The reforms are being phased in starting with the largest employers in October 2012. Under current plans all existing employers will be phased in and required to comply by February 2018.

Employers can opt to provide access to a 'personal account' (aimed at low to middle-income workers) or an equivalent occupational pension scheme. 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 that are not yet required to 'auto-enrol' may continue to provide access to a ‘stakeholder’ pension scheme if they wish - although this is no longer a legal requirement. Stakeholder pensions 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), which provides greater investment flexibility. For owner-managers, a small self-administered scheme (SSAS) may be an option. Schemes such as this can use the pension fund to support the business, for example, through owning your commercial premises.

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