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Reviewing Employee Pay

As a new financial year approaches, employers may be taking this opportunity to review their employees’ pay. COVID-19 has unfortunately made this a more difficult decision than usual.

Many businesses will want to reward employees for their hard work over a difficult period, but some will find pay rises hard to justify in light of the financial impacts of the pandemic.

When setting the national living and minimum wage rates for 2021, the Low Pay Commission balanced the need to support lower-paid workers against the risk of creating additional costs for businesses that are already vulnerable to financial pressures. The national living wage is due to increase by 2.2%, to £8.91 with the age at which workers are eligible for the national living wage being lowered to 23, bringing more young workers into a higher minimum rate of pay.

April 2020 April 2021 Increase

National Living Wage £8.72 £8.91 2.2%

21-22 Year Old Rate £8.20 £8.36 2.0%

18-20 Year Old Rate £6.45 £6.56 1.7%

16-17 Year Old Rate £4.55 £4.62 1.5%

Apprentice Rate £4.15 £4.30 3.6%

Accommodation Offset £8.20 £8.36 2.0%


Alongside legal minimums, employers will be keen to ensure that remuneration enables them to attract and retain the right talent. In doing so, they will want to consider rates that competitors’ pay, the buoyancy of the jobs market, as well as regional differences, the level of demand for the skills employees have, and any changes in their roles over the past year.

Pay schemes and benefits

It’s also important to consider the way you structure your pay schemes as a whole – whether your employees are paid by the hour, on an annual salary, or by commission, for example – and consider whether it’s consistent across your team.

If your team has grown recently, or working practices and roles have changed, you might need to rethink the way your employees are paid. In any case, you should always agree changes with each employee, and seek professional advice to make sure you’re acting within employment law.

You could also consider providing employee benefits to give staff an additional incentive. Depending on what you offer, these may be tax deductible.

2021/22 Payroll Considerations

National Insurance contributions

The primary threshold for class 1 National Insurance (NI) contributions will change from £9,500 to £9,568 per year in 2021/22.

The secondary threshold is rising to £8,840, and the upper earnings limit is changing to £50,270.

Meanwhile, the lower earnings limit is set to stay the same at £6,240 per year.

Student loans

From 6 April 2021, the thresholds for repaying student loans will increase to £19,895 for those on plan one, and £27,295 for plan two. Meanwhile, the postgraduate loan threshold will stay the same at £21,000.

If an employee’s pay exceeds the threshold for their student loan plan, employers will need to make the correct deductions from their pay and report this to HMRC.

Workplace pension contributions

The rules for auto-enrolment are staying largely the same in 2021/22.

Employees who earn more than £10,000 a year and are aged between 22 and state pension age must be automatically enrolled into a workplace pension scheme.

Minimum contribution rates are staying the same, too, with employers required to pay at least 3% of the employee’s qualifying earnings into the pension, with the combined minimum contribution between employer and employee remaining at 8%.

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