Set the right pay rates

If you currently employ people, or intend to, you should set rates of pay that are lawful, affordable, encourage new applicants to apply, and keep existing workers happy and motivated.


6 min read

1. Overview

Setting suitable rates of pay and deciding on pay systems are major decisions with a big impact on your business.

This guide covers what to consider when setting pay rates and meeting your legal obligations, and looks at different systems and how to benchmark against organisations similar to yours.

2. National Minimum Wage and National Living Wage

National Minimum Wage

The National Minimum Wage is set by the UK government and applies in Scotland. It is the minimum hourly pay that almost every worker is entitled to if they are school leaving age or above. This includes agency workers, part-time staff, and trainees. It does not cover students on work placements, volunteers, self-employed people, and company directors. Care should be taken with intern positions.

The exact hourly rate varies depending on the worker's age and whether they are an apprentice. The minimum wage rates change every year on 1 April.

It does not matter how small your business is, you have to ensure that all eligible workers receive this as a minimum.

National Living Wage

All staff aged 23 and over (who are not in their first year of an apprenticeship) are legally entitled to the National Living Wage, at a minimum. This rate is also set by the UK government and applies in Scotland, and the living wage rates change annually on 1 April.

Checking that you are getting this right

This handy calculator will help you check the minimum hourly rates (minimum wage or living wage) you should be paying any member of staff in different circumstances.

After identifying the correct hourly rate, sometimes employers think they are paying the correct wage when they're not. This "check your pay" guide covers various scenarios, for example:

  • wrongly including tips as counting towards the minimum wage
  • forgetting to review the wage on key birthdays - 18, 21 and 23
  • deducting the cost of personal equipment which then takes a worker below the minimum wage.

Difference between National Living Wage and the real Living Wage

The National Living Wage is calculated by the UK government but is not calculated in relation to what employees need to live on.

The real Living Wage is calculated independently every year by The Resolution Foundation, based on their analysis of the minimum wage that workers need to earn to afford a decent standard of living. The basket of goods used to calculate this includes housing, heating, transport and childcare. The rates differ between London and the rest of the UK.

Some employers volunteer to pay the real Living Wage as a minimum to all staff aged 18 and above. They can become accredited as a Living Wage employer by Living Wage Scotland, which is funded by the Scottish Government and works in partnership with the Living Wage Foundation.

3. Equal pay for work of equal value

The law says that men and women are entitled to equal pay. Pay in this context includes contractual benefits such as bonuses and pension contributions, as well as basic wages or salary.

Under the Equality Act 2010, workers have the right to ask their employer for information to help them work out whether they have received equal pay, and if not, why.

Equal pay claims at employment tribunals

Workers who believe they haven't received equal pay may take the case to an employment tribunal.

For their tribunal claim to be successful, a worker will need to compare their pay to that of someone of the opposite sex (a 'comparator').

Ensuring equal pay

To ensure that you are paying your workers fairly, you could undertake a job evaluation. This compares the skills and competencies that each type of job requires. With this information, you can determine which jobs are of equal value.

The evaluation must analyse a job by preset factors that apply to all the jobs under evaluation rather than looking at each job in isolation. Avoid basic errors such as assuming jobs that are being done part-time are of lesser value.

With regular reviews of your pay system, you can build and maintain a robust, fair pay system that stands up to scrutiny and is less susceptible to claims for equal pay.

4. Pay-rate systems

When you select a pay-rate system, you are choosing how you will reward your workers.

Types of pay-rate systems

  • Basic-rate systems pay workers a fixed amount on an hourly, weekly, or monthly basis. These are simple to operate but do not offer many incentives to workers.
  • Variable or incentive schemes are where all or part of a worker's pay is based on performance, skills, results, and/or profits. They could be more expensive if your workers are highly motivated and successful but can also help increase profits. They may be technically more complicated.

Incentive schemes can be based on individual performance, group performance or a combination of both:

  • An individual incentive scheme can help to motivate your workers. However, they may become demotivated if they find that their pay isn't as high as they expected it to be.
  • A group incentive scheme can encourage team working and a sense of contribution. However, they could also result in unequal performances and in extra payments being seen as the norm.

Pay can also be linked to other factors, such as qualifications, which may increase flexibility and promote multi-tasking. However this may also make workers more marketable.

Choosing a system

You will need to find the right system or combination of systems to suit your business. Remember that factors other than cash pay can motivate workers, e.g. benefits, feedback, supervision, training, consultation and work-life balance, which sometimes lead to better retention rates.

Whichever system you choose, you should try to make it as transparent as possible. This is so that everyone knows:

  • how their pay is calculated
  • how they might get a bonus or any other type of pay enhancement

You may need advice from accountancy and HR professionals.

5. Making pay comparisons

To make sure you are getting your pay rates right, consider checking whether or not your rates are competitive with other comparable businesses in your sector and region.

Benchmarking pay

Comparisons can be made with other businesses by region, industry, or other factors such as business size, through benchmarking.

A number of organisations provide benchmarking information on rates of pay and payment systems.

Regional differences in pay

Almost every worker is entitled to be paid at least the National Minimum Wage (NMW). The NMW rates vary according to age but not location, i.e. they are the same regardless of where you are in the UK.

However, for jobs and industries that pay higher than the NMW, there are often regional differences in pay rates. These may occur because of local problems in hiring and keeping workers, or higher living costs specific to particular areas.

Differences in pay across industries

Different factors also influence pay in different industry sectors. Examples include the need for specialist skills or experience, whether the right workers are available, the demand for the products or services, job location, and the nature of the work.

6. Reviewing pay rates and systems

You should regularly review your pay systems and check, at least annually, that your pay rates are competitive.

The benefits of pay reviews

If you regularly review your pay systems, you can check whether or not you are achieving objectives such as cost control, team working, and increased productivity.

Other benefits of regular reviews are that you can:

  • address the effect of factors such as regional changes, industry developments, or skills shortages
  • incorporate the impact of new machinery or technology on your business, such as new skills requirements and new roles
  • review hiring and training policies
  • prepare for changes required by legislation such as revisions to national minimum wage rates
  • review feedback from your workers on whether your pay rates and systems are fair and act as incentives
  • incorporate changes in employment contracts
  • act on decisions from collective bargaining
  • find and close any loopholes that might otherwise have led to claims of pay discrimination on the grounds of gender, race, or status as a part-time worker


You may wish to consider reducing differences in pay structure between categories of employees. This process - called harmonisation - can often be beneficial and be utilised throughout your business.

Consulting your workforce when reviewing pay

You may consider involving workers' representatives in your pay reviews. This encourages feedback and helps you to hear of any problems they are facing.

Alternatively you could set up a pay review committee, which may or may not include workers' representatives, that meets regularly to consider pay-related issues.

7. Commission, bonuses, tips and gratuities

When you choose a pay system for your business that pays - or partly pays - by results, you will need to consider what form those payments will take.

Commission is a payment based on the individual worker's or team's performance. It is common among sales workers to provide an incentive to sell. Because they earn commission, they often have lower basic salaries than other workers.

Some workers are paid by commission only. If you choose purely commission-based pay, you must ensure that a worker is always paid at least the national minimum wage.

Bonuses are generally linked to performance. They can be based on one or more performance measures such as financial results of a business, team and/or individual.

Tips and gratuities are commonly paid to workers in the hotel and catering trade.

These payments can be distributed to workers in a number of ways:

  • directly from customers
  • as a share of a pooling arrangement
  • as a share of service charges paid by customers to the employer

Most money payments that are similar to salaries or wages must have income tax and National Insurance contributions deducted.

If you choose any of these methods of payment, you should also make sure that the system boosts performance and effective teamwork and does not lead to harmful rivalry between workers.

8. Further information

For more guidance on the steps to take if you are considering becoming an employer, there is a handy government guide that covers:

  • Deciding if you need full or part time staff and the different types of employment status
  • Checking you can afford to take on employees and meet the requirements for minimum wage, National Insurance, sick pay, maternity and paternity leave
  • Making your workplace safe
  • Registering as an employer and setting up PAYE
  • Checking your responsibilities around pensions
  • Employers' Liability Insurance
  • Checks you must undertake before employing any individual

ACAS is an independent public body providing free and impartial advice to employers, employees and their representatives on employment rights, best practice and policies and resolving workplace conflict. Their helpline (0300 123 1100) is for anyone who needs employment law or workplace advice, including employers, employees and workers.can offer support.

Find out more about your obligations as an employer by reading our guide to employers' legal obligations on pensions, and pre-employment checks when recruiting a new member of staff.

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