Hiring Staff and Managing Payroll for Small Business Owners
When to Register as an Employer
You should register before you pay employees through payroll for the first time. The window for registration opens 28 days before your first payday.
But when do you actually need to put a worker on payroll? More often than not, new businesses need to register for payroll when they start guaranteeing shifts to individuals. For a complete answer, check out the 'employee or contractor' section below.
After you register, HMRC will process your application and send two payroll codes in the post. These are the Employer's PAYE Reference and Accounts Office Reference. You'll need these codes to send payroll data to HMRC - known as RTI submissions.
Hiring an Employee for the First Time
There are multiple steps to go through when you hire someone for the first time.
Decide How Much You Want To Pay
National Minimum Wage: You must pay employees at least the National Minimum Wage (NMW), which is dependent on their age. You can view current NMW rates here. The government even publish a 'shame' list of companies that do not pay the minimum wage.
National Living Wage: Another option is to aim for the Living Wage. In 2020/21 the London Living Wage is £11.05 per hour and the UK Living Wage is £9.90 per hour. Can you commit to a meaningful wage for all employees? It may send a very positive message to your team and customers.
Market Wage Rates: More often than not, you'll simply have to pay the going market rate to hire the right staff.
Recruitment
Hiring your first employee involves several important steps. Begin by clearly defining the role and its responsibilities. Advertise the job and conduct interviews to assess their skills and suitability. Once you've found the right fit, make a formal job offer.
Right to Work
Employers forget to do this all the time. It's your responsibility to check that your employee has the legal right to work in the UK.
This simple tool will also help you to determine what documents you need to get from your employee.
Some roles also require a DBS check and you should know if that's the case for your industry.
Insurance
Employers Liability (EL) insurance is mandatory. You need coverage of at least £5 million. You can be fined £2,500 per day if you are not insured.
The only exceptions are family members and employees based outside of the UK.
Head to an online insurance marketplace and get a quote. We use PolicyBee.
Employment Contracts
You must provide a written statement of employment to employees. The government have outlined the type of clauses you must include in an employment contract.
It's risky, but many new businesses use an online template when getting started. Examples include RocketLawyer and Sparqa. We suggest using SeedLegals for office-based roles.
Register As An Employer With HMRC
Your accountant can register you as an employer or you can complete the online form yourself. It's pretty easy to do, so don't let an agent charge you hundreds of pounds to complete it for you.
See the first section for more details.
Workplace Pension Scheme
You'll need to set up a workplace pension scheme as soon as you start hiring employees.
Even if you know your team will opt out, you will still need the pension scheme reference number when reporting compliance to The Pension Regulator. We'll go into more detail below.
How Payroll Works
Your regular payroll process will be pretty straightforward when it's up and running, but when you get started it can be a little confusing. Let's outline the typical process and some of the decisions you'll need to make.
Choosing Payroll Frequency
We highly recommend that you pay your employees monthly. It is possible to run payroll fortnightly or even weekly, but it is a significant administrative burden and you'll regret it quickly. It is far better to operate monthly pay runs and reduce the time you spend on payroll duties.
Deducting Income Tax and NI
You'll deduct income tax and national insurance from your employee's gross pay, and you'll forward this to HMRC.
Running Payroll
The basic process looks like this:
- Every month you'll tell your accountant (or payroll software) how much you want to pay your employees.
- Your accountant will prepare payslips and other reports, which they will send to you to approve.
- If you're happy, you'll then pay your employees after tax. This must happen before the pay date listed on your payslip.
- You may also need to pay taxes to HMRC. This is usually due on the 22nd of the following month.
- Your accountant (or you) will submit payroll data to HMRC.
Filing Requirements
Once registered, you'll need to send RTI submissions to HMRC. RTI submissions contain your payroll data for that period.
There are two types of RTI submission. Your choice of payroll frequency will determine when they are due:
- The Full Payment Submission (FPS) contains the bulk of your payroll data. You must send it on or before payday.
- The Employer Payment Summary (EPS) replaces the FPS if you do not pay anyone in the payroll period. It is also used to claim the Employment Allowance and statutory pay.
Holiday Pay
Holiday pay can be a little tricky to understand - especially for irregularly paid staff.
Holiday Entitlement - Full Time Workers: Full time employees are entitled to 5.6 weeks of paid holiday per year. 5.6 weeks is equivalent to 28 days (ie 5.6 weeks x 5 days per week = 28 days). 28 days usually includes 8 bank holidays, so employees are entitled to 20 days holiday. You can offer more if you'd like.
In practice, ordinary full-time employees are usually granted 28 days of holiday. They are paid their usual monthly wage even when taking holiday leave. This meets the requirement for 5.6 weeks paid holiday leave outlined above.
Holiday Entitlement - Part Time Workers: Part-time employees are granted leave in proportion. Someone who works 3 days per week received 3/5 of the 28 day annual entitlement (ie 3 days / 5 days x 28 days = 16.8 days). Assuming the employee takes bank holidays off work, you might choose to grant them 9 days of discretionary leave per year plus 8 days off for bank holidays.
Partial holiday leave calculations are usually rounded up to the nearest half day.
Holiday Entitlement - Irregularly Paid or Casual Workers: This is tricky. Many of your employees will work irregular hours. Calculate their holiday entitlement. For every hour of work, an employee accrues holiday of 7.242 minutes. You can calculate this my multiplying hours worked by 12.07%.
Holiday can be calculated as follows:
12.07% x 64 hours = 7.7 hours
Employees accrue holiday entitlement over time, and you'll likely keep track of this using rota software. Workers will claim holiday leave at a time of their choosing, and in the next payroll you will include holiday pay at their usual hourly rate.
Hourly Rate For Holiday Pay: There is a chunky guide to calculating the average hourly rate for holiday pay, but you can keep it simple by paying an employee at their current hourly rate. This quick solution will fail if an employee's hourly rate of pay has fallen in the last 52 weeks of paid work, which is unusual, so you generally don't need to worry about it.
Holiday Leave At Year End: There are limits to the amount of holiday an employee can accumulate. An employee entitled to 28 days of holiday leave must be allowed to carry forward at least 8 days into the following year. It's a use-it-or-lose-most-of-it scenario. So encourage your employees to take holiday leave or holiday pay as as often as they can.
Employees also accrue holiday while on statutory leave - like maternity/paternity leave - which can build up to a significant number of hours.
Employment Allowance
The first £5,000 of employers national insurance is free (2023/24). It's available for almost any business with more than one employee.
End of Year Tasks
At the end of the tax year (5th April), you'll need to complete certain tasks. This includes sending a final payroll report to HMRC and providing your employees with a P60 form that summarises their earnings and deductions by 31st May.
Employee or Contractor?
Understanding the distinctions between employees and contractors is crucial. Employees have employment rights and are entitled to benefits like holiday pay, while contractors are generally self-employed and responsible for their own taxes.
You could be liable for taxes and penalties should HMRC investigate and decide that a contractor should have been paid through payroll.
Use HMRC's Check Employment Status for Tax tool and save the results to support your decision.
Pensions and Auto Enrolment
If you're employing staff, then you'll need to setup a workplace pension scheme and operate auto enrolment. This is the term given to mandatory pension schemes. They're not completely mandatory for employees - who can opt out if they want - but as an employer you must setup a pension scheme and give your employees the option to save for their retirement.
Pension Contributions
Broadly speaking, you'll pay 3% of an employee's salary as an employer contribution, and your employee will contribute 5%. The Pensions Regulator have outlines three methodologies based around this contribution structure.
Choosing a Pension Scheme
The choice of pension scheme is up to you - the employer. 90% of our clients choose the government backed pension scheme, NEST. It was created to give employers a free option for their workplace pension and a good place to start.
Employees are not stuck with your choice of pension for life. Pension pots are transferable between pension funds. You are also able to switch your pension administrator. So if in doubt - pick NEST - and you can change your mind later.
Communication
Employers are responsible for providing information to their employees about auto enrolment, pension schemes, contributions, and their rights and options. Effective communication will help your team to make informed decisions.
PAYE Settlement Agreements
A PAYE Settlement Agreement (PSA) allows employers to make one annual payment to cover all the tax and National Insurance due on minor, irregular, or impracticable expenses or benefits provided to their employees.
PSAs can simplify administration and are typically used for small or irregular items, or situations where it is difficult to divide the value of an item between individual employees.
You can now apply for a PSA online and it should be done by 5th July after the end of the tax year. Once the PSA is in place, you'll simply calculate and make a single payment to cover all the Income Tax and NI due on the agreed expenses.
Benefits In Kind
Benefits In Kind (BIK) are benefits that employees or directors receive from their employment but are not included in their salary. These can include company cars, private medical insurance, interest-free loans, and more.
Such benefits are often taxable and need to be reported to HMRC. The value of the benefits is added to employees' taxable income, and they are required to pay tax on them, usually through an amended tax code.
You can report BIKs to HMRC by submitting a P11D form for each employee receiving them. This form outlines the types and values of the benefits provided.
The value of BIKs may be calculated using various methods, depending on the type of benefit, and some benefits may be exempt or subject to reduced tax or National Insurance contributions.
Late PAYE Payments and Penalties
Late submissions and payments can result in penalties and interest charges.
If you think you've missed a payment or paid late, it's important to take action as soon as possible. Set up an HMRC Online Services account and add payroll to your account. You'll get an up to date view of your tax position and upcoming payments.
Whether you're an old or new employer, I hope you found this guide useful.
A good small business accountant can help you to manage all of this. If you decide to work with Numble, then you can get started by booking a call with me or getting an online quote.