How To Legally Structure Pay Rises For Employees In Your Business

Every business owner wants to reward hard-working employees - but when it comes to organising a pay rise, there’s a lot more to consider than simply increasing a number on a payslip.

Navigating salary reviews in the UK isn’t just about boosting your team’s morale or reflecting their contributions. It’s also about making sure your pay rise process is fair, legally compliant, and structured in a way that protects your business from risk.

Whether you’re running a small team or a fast-growing company, getting pay rises right from a legal perspective will support growth, build trust, and ensure you avoid common pitfalls that could trigger disputes or even claims in employment tribunals.

In this guide, we’ll break down your key legal obligations when awarding a pay rise, typical risks and how to reduce them, and practical steps you can take to implement pay rise policies in your business confidently.

Why Are Pay Rises Important To Get Right Legally?

There’s no doubt that pay rises can have a positive impact on your employees’ motivation and loyalty. For many businesses, they’re a crucial tool for retaining talent and keeping pace with the market.

But ignoring the legal side of things can leave your business exposed. If you handle a pay rise (or a refusal) poorly, you could face:

• Claims for breach of contract if changes are made incorrectly or unfairly
• Equal pay disputes, particularly if pay rises appear discriminatory
• Complaints to the Employment Tribunal
• Negative impact on staff morale and your business’s reputation
• Compliance risks with statutory obligations, such as National Minimum Wage changes

Structuring your pay rise process in line with UK employment law sets clear expectations for everyone - and gives you a solid foundation for defending your business if there are any challenges.

What Laws Apply To Pay Rises In The UK?

Whether you’re considering a one-off pay rise or regular salary reviews, several key legal frameworks need to be factored in:

• Employment Rights Act 1996: This lays the foundation for most employment contracts, setting out what needs to be in writing - including pay.
• The Equality Act 2010: Makes it unlawful to discriminate on the basis of protected characteristics (such as gender, race, disability) in relation to pay decisions, promotions and pay rises.
• National Minimum Wage and National Living Wage Laws: These rates are reviewed annually, and businesses must ensure that after a pay rise (or even without one), every employee remains at or above the statutory minimum. Find out more in our guide to minimum wage compliance.
• Employment contracts and written statements of particulars: If pay terms are set out in a contract, any changes (including a pay rise) may require written confirmation and employee consent.

Pay is a “core term” of every employment relationship - and the law expects employers to treat it transparently and fairly.

Should Pay Rises Be Included In Employment Contracts?

Most employment contracts specify the employee’s current salary or hourly rate. However, it’s not usual to guarantee future pay rises in the contract, unless this is specifically agreed (for example, in unionised environments or where pay is linked to a collective agreement).

Instead, companies tend to:

• Set out a pay review process (e.g. “the Company reviews salaries annually but is not obliged to increase pay each year”)
• Reserve the right to award pay rises at their discretion or in line with business performance/market factors
• Expressly state that changes in pay will be confirmed separately in writing

This approach gives you flexibility, but does not allow you to unilaterally change pay terms without consulting the employee. If you do give a pay rise, it’s good practice to confirm this by letter or email - and update payroll and internal records accordingly.

For more on how to update employment contract terms safely, check our guide on how to legally update contracts.

How Can I Structure A Fair And Legal Pay Rise Process?

Every employer should develop a clear process for handling pay rises. This shouldn’t just be an “ad hoc” decision: a structured approach is more likely to be seen as fair by your team, and will help you withstand legal scrutiny if a dispute arises down the track.

Key Steps To Structuring Pay Rises Legally

• Have a Clear Pay Review Policy: Draft a written policy explaining how and when pay reviews will take place, and what factors are considered (e.g. performance, length of service, role changes, market movements).
• Apply Your Policy Consistently: Avoid giving pay rises in a way that could be seen as biased, arbitrary or discriminatory.
• Record All Decisions and Rationale: Make notes of how you arrived at your decision to offer (or decline) a pay rise. This helps if you need to defend your approach later.
• Put Every Pay Rise In Writing: Confirm pay increases with a formal letter or email, including the new amount and when it takes effect.
• Update Contracts If Needed: Where the pay rise impacts contractual terms, issue an updated contract or written amendment for the employee to sign.
• Check Payroll, Tax and Pension Adjustments: Ensure HMRC, payroll and pension schemes are all updated to reflect the new pay amount.
• Review Minimum Wage Compliance: Double-check that after the pay rise, everyone in the business remains compliant with National Minimum Wage or National Living Wage laws (see the latest rates here).

When handled this way, your process is much less vulnerable to legal challenges and should stand up to scrutiny if an employee questions your approach.

How Do I Avoid Discrimination And Equal Pay Problems?

One of the biggest legal risks around pay rises is unintentional discrimination.

Under the Equality Act 2010, it’s illegal to treat employees less favourably in pay decisions on the basis of protected characteristics, such as:

• Gender (including pregnancy and maternity)
• Race or ethnic origin
• Age
• Disability
• Sexual orientation or religion

If a male and female employee do “equal work” but only one receives a pay rise - without clear reasons - you could be at risk of an equal pay claim.

To avoid discrimination:

• Rely on objective criteria - such as measurable performance or business case
• Keep records of your decision-making process
• Be cautious of informal or “under the table” pay rises that lack transparency
• Respond quickly if an employee raises a concern about pay fairness

If you’re ever unsure, it’s wise to seek advice from an employment lawyer to check your pay policy and decisions are non-discriminatory.

When Must I Review Or Increase Employee Pay?

Businesses must increase pay when:

• A legal minimum wage rate rises and employees’ pay falls below the new threshold
• A contractual or collective agreement guarantees a pay increase (sometimes linked to inflation or company performance)
• Statutory changes require it (e.g. as part of TUPE transfers, or to comply with minimum wage or living wage).

Other than these triggers, pay rises are generally at your discretion, unless you’ve specifically agreed to review pay (e.g. “annual pay review”) or there are trade union agreements in place.

It’s good business practice to regularly review pay to remain competitive and retain staff, but unless legally required, you must follow a fair policy and be transparent with employees about the process.

Can I Offer Non-Salary Perks Instead Of A Pay Rise?

Sometimes, your business may not be in a position to increase salaries immediately, but you still want to recognise employee contributions. Alternative options include:

• Bonuses or one-off payments
• Increase to benefits or flexible working arrangements (see more here)
• Employee share schemes (such as EMI options - find out how they work)
• Professional development support (training budgets, study leave)

While these perks can be valuable, they do not replace your obligation to comply with minimum wage laws or other statutory pay entitlements. Any changes to an employee’s “overall reward package” should still be put in writing - otherwise, there’s risk of disputes or misunderstandings.

What Should Be Included In A Pay Rise Letter?

Whenever you award a pay rise, best practice is to confirm this clearly in writing, even if you’ve discussed it in person. A typical pay rise letter should include:

• Employee’s name and role
• Date the pay rise takes effect
• Current salary/hourly rate and new salary/hourly rate
• Whether the change affects commission, overtime, bonus, etc.
• Any other changes to benefits or contractual terms (if relevant)
• Confirmation that all other contract terms remain the same (unless you are issuing an updated contract)

If the pay rise requires a new or updated contract, make sure both your business and the employee sign it. Untidy documentation can cause confusion or disputes months later if you can’t show clear evidence of agreement.

For more help creating compliant employment contracts or pay documentation, we always recommend you avoid generic templates and have these tailored to your business.

How Should Small Businesses Handle Pay Rises For New Hires Or Probationary Staff?

It’s common for new employees to start on a probationary period, with a possible pay rise review at the end. To structure this safely:

• Confirm the probationary period and any conditional pay rise (e.g. “following a successful three-month probation, your pay will increase from £X to £Y”)
• Clearly state in their contract or offer letter how and when this will be reviewed
• Document performance reviews and the rationale for any pay decisions
• If a pay rise is not awarded, explain why and confirm the employee’s right to discuss or appeal (if this is your policy)

This keeps your small business’s process fair and mitigates the risk of a claim for breach of contract or discrimination at the probationary stage. For more on building a robust onboarding process, see our employee onboarding guide.

Common Mistakes When Structuring Pay Rises (And How To Avoid Them)

We often see businesses tripped up by similar errors when awarding pay rises. Watch out for these pitfalls:

• Not confirming pay rises or changes in writing
• Making changes without involving or informing the employee (risking breach of contract)
• Failing to check the impact on National Minimum Wage or Living Wage requirements
• Inconsistent or secretive pay rises (increasing risk of equal pay claims)
• Using generic templates for contract updates rather than getting legal advice - putting your business at risk

Setting up a clear, documented, and compliant process for awarding pay rises will make life much easier. That’s where consulting a legal expert can protect you from day one.

Key Takeaways: How To Legally Structure Pay Rises In Your Business

• Always document pay rises in writing, and update employment contracts where necessary.
• Apply your pay rise process consistently and avoid discrimination to reduce the risk of claims.
• Comply with National Minimum and Living Wage rules - increase pay when rates change.
• Have a clear pay review policy: set out when and how pay is reviewed and awarded.
• Consider non-salary perks, but ensure all minimum pay obligations are still met.
• If in doubt, seek tailored legal advice rather than using templates or guessing.

If you’d like help structuring pay rises or reviewing your employment contracts, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat. We’re here to help you grow your team with confidence and legal peace of mind.