Becoming an employer for the first time
As your business expands, you will inevitably need to hire staff to help you manage the increasing workload. Becoming an employer means you will need to comply with various legal obligations, such as running a payroll, providing a workplace pension, and adhering to other employment legislation. Here are some of the basic key points you need to action once you decide to recruit staff and become an employer for the first time:
- Register as an employer with HMRC and obtain a PAYE reference number
- Deduct PAYE and national insurance from employee salary payments
- Register with the Pensions Regulator for automatic enrolment
- Set up a workplace pension scheme, such as NEST
- Choose payroll software that is RTI (real-time information) compliant
- Provide employees with details of the terms of employment
- Make sure you have appropriate business insurance, i.e., employer’s liability insurance
Register as an employer with HMRC
Becoming a new employer may require you to register with HMRC. You can do this online and HMRC will issue your business with a PAYE reference number. To check whether you need to register, use the following link on HMRC’s website:
Register as an employer – GOV.UK
You need to register with HMRC as an employer before the first official payday. HMRC may take 5 to 10 days to issue the PAYE reference, and you can only register as an employer up to 2 months before the first pay date. HMRC will also provide an accounts office reference number, which is used for PAYE and national insurance contribution payments.
Payroll deductions
As an employer, you are legally required to make payroll deductions from your employees’ pay. The main deductions are income tax (PAYE) and employee national insurance contributions. Employers also pay employer national insurance contributions to HMRC. All deductions must be paid to HMRC by the 22nd of the following month or by the 19th if paying by cheque. You will need to quote your accounts office reference number when making PAYE and NI payments to HMRC.
Payroll software
Unless you outsource your payroll to a payroll bureau, you will need to use payroll software. All payroll returns must be submitted to HMRC electronically under RTI (real-time information). HMRC offers payroll software for up to 10 employees called Basic PAYE Tools, which can be downloaded using the following link:
Download HMRC’s Basic PAYE Tools – GOV.UK
Alternatively, numerous cloud-based accounting software packages include payroll or offer it as an add-on for a modest fee. Below are a few options to consider:
Accounting software for every small business – FreeAgent
Xero Accounting Software | Xero UK
Payroll Software | RTI & HMRC recognised | Auto Enrolment Functionality
Workplace pension
Employers have a legal duty to enrol all eligible employees into a workplace pension, also known as auto-enrolment. Once you have registered as an employer, the Pensions Regulator will contact you with details of auto-enrolment. Eligible employees are staff who are between 22 years old and state pension age, earning over £10,000 a year. Employers are legally required to contribute a minimum of 3% of employees’ eligible earnings to a workplace pension, while employees must contribute 5%. Non-eligible staff members can request to join the pension scheme. The link below will take you to the Pensions Regulator website:
The cost of employees
Before recruiting new staff members, it is helpful to get an estimate of the employment costs. Take a look at our article that breaks down employment costs:
Employee Cost Calculation – MQCalcs
Payroll forms – The P forms
As an employer, you have numerous reporting obligations to both HMRC and your employees. These are some of the common forms and payroll returns you will encounter as an employer:
P60 – This is the form you are required to provide to your employees at the end of the tax year. The P60 details the amount of PAYE and national insurance that employees have paid during the tax year. It also includes their tax code. The tax year runs from the 6th of April to the 5th of April of the following year.
P45 – When a staff member leaves your employment, you need to issue them with a P45. New staff members should provide you with a copy of their P45, which details their tax code, income and tax paid cumulatively for the year to date. If they don’t have a P45, they will need to complete a new starter form.
P11D – Some employers offer additional benefits to employees, such as gym membership, private medical, company cars, etc. Some benefits are tax-free, and others are subject to PAYE for employees. Employers incur Class 1A national insurance contributions on certain benefits. Any taxable benefits must be reported on a P11D form, with both HMRC and the employee receiving a copy. P11D forms are completed and submitted electronically to HMRC. Benefits can be taxed through payroll, known as payrolling benefits, and in this instance, no P11D forms need to be completed.
P11D(b) – This is the form used to declare employer national insurance contributions due on staff benefits. Both P11D and P11D(b) forms must be submitted by the 6th of July following the end of the tax year in April.
P46 – When an employee is provided with a company car, HMRC must be advised by submitting a P46 form.
Employee benefits
You can learn more about employee benefits using the following link:
Expenses and benefits for employers: Overview – GOV.UK
In closing …
As an employer, it is vital to ensure your business is compliant, submitting payroll returns and payments on time to avoid fines from HMRC. Seeking professional advice from an accountant or payroll bureau when becoming an employer for the first time is highly recommended. The following link provides additional guidance about employing people:
