Paying employees

Rates, tax, pensions, annual leave, TOIL and sick pay

Everything you need to know once you've chosen your successful applicant and they've signed a contract.

The rate of pay 

Employees must be paid at least the National Minimum Wage or National Living Wage, whichever is applicable. The current levels, which change each year, are on the government website. 

Make sure to set levels of pay for employees on a consistent basis so that differences in pay can be explained if you’re challenged. 

Tax responsibilities 

Employers need to deduct Pay as You Earn (PAYE) tax and employee’s National Insurance contributions (NICs) from employees’ pay, and also pay employers NICs. Employers must register with HMRC and will be given a PAYE reference and an Accounts Office reference and a report must be made to HMRC every time an employee is paid. The employee is entitled to receive an itemised pay statement showing deductions of PAYE and NICs (and any other deductions). Employers also need to keep their own records of money paid, and deductions made. 

Payroll can either be run in-house with one of the payroll software tools available online or can be outsourced to a third party. This should be someone appropriate, like an accountant, to make calculations, reports and keep records. 

Each time a payment is made to an employee a Real-Time Information (RTI) Full Payment Submission must be made by the employer to HMRC, and all tax and NICs must be paid to HMRC by a specified date. 

Detailed guidance on these steps can be found on the HMRC website. 


It’s a requirement for employers to enrol qualifying employees into a pension scheme which the employer and the employee contribute, called as auto-enrolment. Qualifying employees are called eligible jobholders. There’s no general exception for small employers. Jobholders include permanent, temporary employees and agency workers. 

The jobholder must be between 22 and state pension age and earn the minimum amount as specified by the Department for Work and Pensions (DWP) each tax year. Employers can choose to use a three-month postponement period before a jobholder is enrolled. Jobholders who are not eligible to be auto-enrolled by their employer might still have a right to opt into their employer's pension scheme and, in some cases, receive employer contributions. The specific rights vary, depending on whether such worker is a non-eligible jobholder or an entitled worker. More information is available from the Pensions Regulator. The Pensions Regular also has  standard letter templates for auto-enrolment pensions. 

Annual leave entitlement 

Every employee is entitled to a minimum of 5.6 weeks of annual leave in any annual leave year. This equals 28 days for someone who is working five days per week. This can include public and bank holidays -  there are normally eight per year in the UK. Employees are entitled to their full normal pay during any period of annual leave and should be encouraged to take at least the statutory 28 days’ leave within the annual leave year. If this isn’t possible because of sickness or statutory family leave, then it can be necessary for an employee to carry forward unused annual leave. If the employer gives annual leave of more than 28 days, it’s a matter for agreement whether the annual leave can be carried forward and in what circumstances. 

Time off in lieu and overtime 

Time off in lieu, commonly known as TOIL, is when an employee has worked extra hours and instead of being paid overtime, they take extra time off. If employees are allowed to take time off in lieu or to work paid overtime, there needs to be a clear system where this is being monitored, so that employees aren’t accruing lots of time off in lieu or overtime without their employer knowing. 

Sick pay 

Employees are entitled to statutory sick pay, sometimes called SSP, after the third working day of sickness absence, for a period of up to 28 weeks. The current SSP rate can be found on the GOV.UK website. The contract of employment can provide an additional amount of contractual sick pay. After this expires, statutory sick pay will continue to run for the remainder of the 28-week period, if applicable.