HR · 28 March 2017

Definitive guide to hiring your first member of staff: Benefits and salary

Guide to hiring
Designated payroll software can help lift the administrative burden of tax, National Insurance and student loan calculations

As you consider whether to take on that first member of staff, our guide to hiring moves on to the essential employer benefits and salary considerations.

Over the course of this guide, we’ll be outlining the key procedures that you’ll need to follow to ensure a smooth transition into employerhood. First, we covered everything you need to know about registering staff and your insurance responsibilities as a new employer, before taking a look at which aspects of employment law will be relevant to you. Now, we will guide you through benefits and salaries.

Salary and non-cash benefits

Another vital step is to decide how much to pay your new employee – as a minimum, you must pay the National Minimum Wage or National Living Wage, depending on your employee’s age. You should also decide how often to pay your new member of staff.

Weekly and monthly payments are both popular options among employers but there are no hard and fast rules – it’s up to you to decide what’s best for your business.

You may want to consider supplementing the employee’s salary with some non-cash benefits, such as childcare vouchers or the Cycle to Work scheme.

If you decide to offer non-cash benefits in exchange for a reduction in salary, you’ll need to make sure you comply with the rules for salary sacrifice.

You will also need to file a form P11D by 6 July each year to declare any non-cash benefits you provided in the previous tax year. 

Paying your staff

Each time you pay your employee, you must run payroll. This involves:

  • Recording the employee’s total pay
  • Calculating how much tax and employee’s National Insurance you’ll have to deduct from the employee’s wages and then pay to HMRC
  • Calculating any other sums you might need to deduct from the employee’s pay, such as student loan repayments or money that a court has ordered to be deducted, such as overdue council tax calculating the employer’s National Insurance contribution that you’ll need to pay
  • Producing payslips electronically reporting the employee’s pay and deductions to HMRC in a Full Payment Submission (FPS) through the Real Time Information (RTI) system

We strongly advise that you use payroll software to handle your payroll, as the calculations for tax, National Insurance and student loans in particular can get very complicated.

PAYE and tax codes

The tax you deduct from your staff’s wages is called income tax, and it’s worked out using a system called Pay As You Earn (PAYE). The amount of tax you deduct under PAYE depends on the employee’s tax code. You must enter the tax code that HMRC gives you for the employee into your payroll software.

Alternatively, if your new employee had a previous job, they’ll give you a form P45 which will display the tax code you should use. If the employee joins you part-way through a tax year, the P45 will also show how much money the employee has earned so far that year and how much tax their previous employer deducted from their wages.

You’ll need to enter these figures into your payroll software to make sure you deduct the right amount of tax from your employee’s wages for the rest of the tax year.

Employee’s National Insurance

Along with the income tax deducted under PAYE, you must also deduct employee’s

National Insurance from your staff’s wages and pay it to HMRC. The class of insurance that employees pay depends on their employment status and how much they earn, as well as whether they have any gaps in their National Insurance record.

National Insurance and who pays

Class 1

Employees earning more than £156 a week and under state pension age – these contributions are automatically deducted by employers.

Class 1A or 1B

Employers pay these directly on their employee’s expenses or benefits.

Class 2

Self-employed people. People who earn less than £5,965 a year don’t have to pay these contributions but can choose to do so voluntarily.

Class 3

Voluntary contributions – people can choose to pay these contributions to fill or avoid gaps in their National Insurance record.

Class 4

Self-employed people earning profits over £8,060 a year.

Real Time Information (RTI)

Each time you pay your employee, you have to tell HMRC how much salary you’re paying and how much tax, employee’s National Insurance and employer’s National Insurance that HMRC can expect to receive. You must report this information electronically, either before you pay your staff or on their pay day, through the RTI (Real Time Information) system.

To get set up for RTI, you need to:

  • Register for HMRC’s online services (if you haven’t already done so)
  • Log in to HMRC’s online services for PAYE
  • Wait for your activation code to arrive in the post

You then need to make a Full Payment Submission (FPS) every time you pay an employee. Some software providers allow you to do this automatically through your payroll, but you can also use HMRC’s basic tools to make a Full Payment Submission directly to HMRC.

Employee expenses

Once they’ve started in their new role, your employee may use their own money to pay costs on behalf of the business (e.g. paying for a train ticket to visit a client). In most cases, you should be able to reimburse the employee directly for these expenses.

Auto-enrolment for pensions

Automatic enrolment is a new piece of legislation for employers. It means that over the next few years, most employers will have to automatically enrol workers into a workplace pension scheme if employees:

  • Work in the UK
  • Are aged between 22 and state pension age
  • Earn more than £10,000 a year

You can use the Pensions Regulator’s staging date calculator to find out when you’ll be enrolled. This guide shows all the staging dates.

When an employee leaves

Looking ahead to when the employee moves on from your business, there are a few things you’ll need to do to ensure that they are paid correctly and that they have the documentation they need.

When you run payroll for the employee’s final period of employment, make sure that you’ve entered their leaving date and salary correctly in your payroll software before you submit the payroll to HMRC.

You also need to print a form P45 and give it to your employee before they leave.

Taking on your first member of staff: The final checklist

  1. Register your business as an employer with HMRC
  2. If required, make sure you have employer’s liability insurance
  3. Check the employee has the right to work in the UK
  4. Carry out any other checks that are required for the role
  5. Decide how much and how often you’ll pay your new employee
  6. Familiarise yourself with the rules of salary sacrifice if you plan to offer non-cash benefits in exchange for a reduction in salary
  7. Prepare either a written statement of terms and conditions or an employment contract
  8. Choose your payroll software
  9. Register for Government Gateway and activate online RTI filing
  10. Establish the employee’s tax code (ask them for their P45 if appropriate)
  11. Use the Pensions Regulator’s staging date calculator to check when your business will have to comply with automatic enrolment for pensions

Don’t miss the previous instalments in our definitive guide to hiring your first staff member:

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ABOUT THE EXPERT

Emily Coltman is chief accountant to FreeAgent, provider of cloud accounting software for freelancers, micro businesses and accountants. She is passionate about helping the owners of small and growing businesses to escape their “fear of the numbers” and she translates small business finance and tax into practical common sense speak.

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