As your small business grows, you may find yourself considering whether to recruit an employee to help you.
But before you start placing that first job advert, it’s important to remember that taking on a member of staff can be a complicated process that may require a lot of forward planning and expertise.
1) You’ll need to register as an employer
If you’re going to pay your new employee more than the National Insurance Lower Earnings Level, which is currently £112 per week, you will need to register as an employer with HMRC.
HMRC will give you various reference numbers to use as an employer, and you’ll need to make sure you deduct the right amount of tax and National Insurance from your employee’s wages before you pay them. You’ll also need to pay additional National Insurance as an employer.
HMRC warns that you should register as an employer before your first staff payday, and that it can take up to two weeks for them to complete the registration process. Don’t register as an employer on the off-chance, though, because that can result in a lot of unnecessary paperwork if you don’t end up taking on a member of staff, and you may even run the risk of incurring fines or penalties when you don’t file the paperwork, or pay the tax and NI, that HMRC are expecting from you.
2) You’ll have to collect your new employee’s P45
When your new employee joins, if they’re coming to you having left a previous employment, they’ll give you a form called a P45. This will show several important pieces of information.
If your new employee has worked for someone else since the beginning of the last tax year, April 6th, then the P45 will say how much they have already been paid in the tax year by their previous employer, and how much tax that employer took from their wages. This is important, because it’ll affect how much tax you take off their wages, so you need to put it into your payroll system.
It’ll also have their tax code, which again affects how much tax you take off their wages. Tax codes change depending on circumstances such as whether the employee is paying off unpaid tax from a previous year, or has had non-cash benefits, such as a company car.
Make sure you collect a form P45 from each new employee as they join.
However, remember that if your new employee was self-employed before joining you, they may not have a form P45 to give you. In that case, you’ll need to work through the Starter Checklist provided by HMRC, to make sure you take the right amount of tax from your new employee’s wages when you start paying them.
3) Remember NI as well as PAYE
Employers deduct income tax from their staff’s wages under the Pay As You Earn (PAYE) system. PAYE isn’t a tax in itself, it’s a system for collecting income tax.
As an employer, you’ll also need to deduct employee’s National Insurance (NI) from your staff’s wages. Your employee gets their wages after you’ve taken these two amounts off – PAYE and employee’s NI.
You’ll also be liable for employer’s NI. This is an extra amount on top of your staff’s wages; you’re not allowed to take it from their wages, it’s an additional cost employers have to meet. There are allowances that can help with employer’s NI, and you don’t have to pay it for everyone; for example, you don’t have to pay any employer’s NI on the wages of staff who are under 21, unless you’re paying them over £815 a week.
Add up all the PAYE and both kinds of NI on your staff wages, and pay them to HMRC, usually monthly. If you use software to run your payroll, it’ll work out the PAYE and NI for you.
4) Be prepared to report to HMRC on or before each payday
You need to send an electronic report to HMRC, on or before each day you pay your staff, showing who you’re employing, how much their salary is, and how much PAYE and NI you’re going to pay to HMRC.
Plan this into your regular schedule, because HMRC will levy fines if you’re late.
Emily Coltman FCA is chief accountant at FreeAgent.
Further reading on employing staff
