Remuneration and pensions

Employee remuneration and benefits are an important element of recruiting and retaining the right employees. The right remuneration can create powerful employee incentives while at the same time ensuring you comply with key pay laws.

Employee pay

Remuneration packages are often based on the going rate, with higher quality employees and specialised skills commanding higher salaries. While you are broadly free to offer and negotiate the pay you think necessary to attract and motivate employees, hours and pay laws require that you at least pay the minimum wage and offer equal pay for work of equal value.

Remuneration is a key element of an employment contract. Once you have negotiated an employee’s pay entitlement, you cannot unilaterally reduce it or make unauthorised deductions. You are legally obliged to provide an itemised pay statement.

You must also honour employees’ entitlements to sick pay and to maternity, paternity or adoption pay. 

Employee incentives

Performance-related pay can help incentivise employees. For example, remuneration packages for sales employees often include significant bonuses or commission. Incentive pay schemes need to be carefully designed and monitored to ensure that they deliver improved results.

Employee share option and share schemes can help to align the interests of employees and shareholders, by giving employees a direct financial interest in the 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.

It’s worth remembering that non-financial rewards can be important incentives. For example, a pleasant working environment boosts staff retention and flexible working appeals to many potential recruits.

Remuneration and tax

As an employer, you are legally obliged to operate Pay As You Earn (PAYE) on your payroll, deducting income tax and National Insurance contributions (NICs) from employees’ pay and transferring the deductions to HM Revenue & Customs.

If the remuneration you offer employees includes taxable benefits, you may need to make deduct tax and NICs for these as well. Some benefits – for example, approved share schemes – and pension contributions can be a very tax-effective way of remunerating employees.

More complex tax-planning opportunities are available to business owners: for example, drawing cash from your company in the form of dividends rather than pay.