Here, Emily Coltman, Business Advice expert and chief accountant to accounting software provider FreeAgent, provides a four-point enrolment checklist for employers taking on new staff members.
For many small business owners, the autumn months represent a great opportunity for growth following the traditionally leaner and less busy summer period. And for those expecting a boost to their sales in the near future, this may also mean they have to consider employing new staff.
But if you’re a small business owner in this position and you’re thinking about recruiting your very first employee, what do you need to know before you start placing that job advert?
Register with HMRC
If you’re going to be paying your new employee more than the National Insurance Lower Earnings Level, which is currently £113 per week, you will need to register as an employer with HMRC.
HMRC will give you various reference numbers that you need to use as an employer, and you must ensure you deduct the right amount of tax and National Insurance (NI) from your employee’s wages before you pay them. You’ll also need to pay additional NI as an employer.
HMRC recommends that you register as an employer in advance of your first staff payday, and warns that it can take up to two weeks to complete the registration process.
However, you shouldn’t register as an employer on the off-chance, 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 is expecting from you.
Collect your new employee’s P45
When a new employee joins you having left a previous employment, they will give you a form called a P45 which will show several important pieces of information. Make sure you collect this as soon as you can.
If they have worked for someone else since the beginning of this tax year (6 April) 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 will affect how much tax you take off their wages, so you need to put the information into your payroll system.
The P45 will also include their tax code, which will also affect 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.
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.
Stay on top of PAYE and NI
Employers deduct income tax from their staff’s wages under the Pay As You Earn (PAYE) system. PAYE isn’t a tax in itself, but rather it’s a system for collecting income tax.
However, as an employer, you also have to deduct employee’s National Insurance (NI) from your staff’s wages. That means their final go-home pay will be their wage after these two amounts have been taken off – PAYE and employee’s NI.
In addition, you will also be liable for employer’s NI which is an additional cost that employers have to meet. You’re not permitted to take this from your staff’s wages – it’s an extra amount to be paid on top of these.
However, 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 years old, unless you’re paying them over £866 per week).
You will have to add up all the PAYE and both kinds of NI on your staff wages, and pay them to HMRC, usually monthly – although if you use software to run your payroll, it should work out these PAYE and NI calculations for you.
Report to HMRC on or before each payday
You will 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.
Make sure that you plan this into your regular schedule, because HMRC will levy fines if you’re late.
Emily Coltman FCA is chief accountant to FreeAgent, cloud accounting software provider for micro business owners, freelancers and their accountants
Emily’s three-part guide to recruiting your first member of staff is an essential addition to this enrolment checklist
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