Remuneration

3. Basic Pay

The most basic level of pay is set by law, with the national minimum wage currently fixed at £5.52 an hour for employees aged 22 or over. Above that, you can decide what and how you pay your employees. (See Minimum wage and statutory pay obligations.)

3.1 Will you pay by time or performance? There are several possible approaches.

• The choice between wages and salaries is often a matter of tradition or expectations. Weekly wages suit companies with a fixed working day, short working hours or irregular patterns of work.
• Hourly pay may lead to high overtime costs if demand is irregular.
• Annual hours contracts can offer flexibility for both you and your employees, while avoiding premium payments for overtime.
• Piece rates-link pay directly to productivity.
• Commission can range from the icing on the cake to the main element in the pay packet.

3.2 Your pay structure may be simple, but there should be some logic to it. It should be clear and fair.

• The aim is to create a situation where employees can feel their pay is reasonable, compared with each other.
• Part-timers and full-timers should be able to see how their pay is related.
• You must meet your legal obligations (eg to give equal pay for work of equal value). Make sure all decisions are free from discrimination.
• Equal pay questionnaires allow employees to ask specific questions about pay levels, so you need to make sure you go by the book. Record all decisions and make sure they are supported by a robust process.
• Consider undertaking an equal pay review to identify any problematic areas and potential corrective measures.

3.3 Decide what part overtime is going to play - and how you are going to value it.

3.4 Be aware of tax and National Insurance (NI) thresholds. Do not pay people amounts that will put them just above a threshold.

• It may be possible to use tax-efficient incentives, rather than raising pay (see 5).

3.5 Paying out cash as share dividends, rather than income, is still a tax-efficient way of remunerating shareholders - usually directors, investors and senior employees.

• If you and your partner are employed in the same business, make sure you have good evidence of what each does. HM Revenue & Customs (HMRC) has recently been targetting spouses paid through dividends.
• Dividends attract income tax, but no NI.