Dive into the world of PAYE investigations. Uncover the facts, implications, and insights in this informative blog
There are a multitude of rules and regulations that you must be aware of when you start employing staff for the first time. The decision to employ your first employee is a big step and you will be navigating a new world of recruitment, staff relations and payroll.
Hiring your first employee is a big step but can help your business to thrive. For example, by giving you more time to work on new opportunities or by adding a new skillset to your repertoire.
You may also need assistance in the process of hiring your first employee. This could include the use of an employment agency to help identify and find the best person for the job. The interview process can also be complex especially with the coronavirus restrictions currently in place so you may need to conduct interviews remotely (using Zoom or other similar services).
You must also make sure you follow a fair recruitment process. It is against the law to discriminate against any candidates during the recruitment process or in their employment.
A full examination of the rules is beyond the scope of this article however we wanted to list the following points from HMRC’s guidance which sets out some important issues to be aware of when becoming an employer:
- Decide how much to pay someone - you must pay your employee at least the National Minimum Wage (NMW).
Employers have a legal obligation to pay the required NMW or National Living Wage (NLW) rates to their employees. It is a criminal offence to ignore these obligations.
The rates are updated annually, during April. The rates per hour are:
|National Living Wage
|Aged 23 & over (2020-21: Aged 25 & over)
|National Minimum Wage
|Aged 21 to 22 (2020-21: Aged 21 to 24)
|Aged 18 to 20
|Aged 16 and 17
Remember that the total cost for your employee will exceed their salary. You must also factor into your calculations other costs including National Insurance Contributions, pensions contributions, training, sick pay, and holidays.
- Check if someone has the legal right to work in the UK. You may have to do other employment checks as well.
Due to coronavirus (COVID-19), there are temporary changes to the way you can check documents. You can ask for documents digitally and make checks on a video call instead of in person.
- See if you need to apply for a Disclosure and Barring Service (DBS) check. This is used to check a potential employee’s criminal record. The DBS was previously known as a Criminal Records Bureau (CRB) check. This is common in areas including working with children, vulnerable people or security. You can request a more detailed check for certain roles, for example in healthcare or childcare. There are different rules for getting a criminal record check in Scotland and Northern Ireland.
- Get employment insurance - you need employers’ liability insurance as soon as you become an employer. This will allow you to pay compensation if an employee is injured or becomes ill because of the work they do for you. Your policy must cover you for at least £5 million and come from an authorised insurer. If you do not have this insurance, you could face fines of up to £2,500 per day if you are not properly insured.
- Send details of the job (including terms and conditions) in writing to your employee. You need to give your employee a written statement of employment if you’re employing someone for more than 1 month.
You must send a written statement that provides the employee with the conditions of their employment. This statement must be provided within two months of the employee starting work for you. This is not to be confused with an employment contract rather it is a document setting out the employment terms.
The document must include certain important details including the employer’s name, pay details, work hours, holiday entitlement, other benefits and the place of work.
- Ensure that you register as an employer with HMRC. You can do this up to 4 weeks before you pay your new staff. This process must also be completed by directors of a limited company who employ themselves to work in the company.
To make the process of registration as quick as possible, you should have the following information to hand:
- your name
- your business name, business partner's name, company name, charity name or organisation name
- business or home address, including postcode – as appropriate
- business or home telephone number
- contact email address
- name and address to send correspondence to
- the date of your first payday or, if earlier, the first date you made payments of expenses and/or provided benefits to your employees.
- Check if you need to automatically enrol your staff into a workplace pension scheme.
The Government introduced automatic enrolment for workplace pension schemes to encourage more people to save for their retirement. Both the employer and employee need to contribute. For most staff, there is a minimum employer contribution of 3% and employee contribution of 4%. This means that contributions in total will be a minimum of 8%: 3% from the employer, 4% from the employee and an additional 1% tax relief. The contributions are based on qualifying earnings.
Adding new employees to payroll
To pay your employee for the first time, you can calculate and set up your own payroll. HMRC has an online tool that guides you through the process so you can pay your employee whilst complying with your legal obligations.
You generally have the choice between using a payroll provider or running your payroll yourself, which we do not recommend unless you are very familiar with UK payroll compliance. The annual cost for a two-person payroll may only be less than £200/year and yet correcting a small mistake will cost you more than that to fix. So it is not worth the risk for such a small sum, but make sure that you find someone who explains the optimal payroll rate for directors so that you know that you have someone who knows the benefits of paying yourself at the correct level.
If you do decide to run your own payroll you must choose suitable payroll software. Setting up payroll for the first time can be an onerous and complex task. We can of course help advise you to ensure you meet the necessary requirements in the most efficient way possible.
Employers that take on a new employee need to work out which tax code and starter declaration to use in their payroll software. Incorrect tax codes can lead to the new employee paying more tax or less than is due.
The necessary information can be collected from the employee’s P45 or by asking the new employee to complete HMRC's P46 new starter checklist (if they do not have a recent P45). A number of changes have been made to the new starter checklist from April 2020 to make it easier to complete.
The information collected must be held in the employers’ payroll records for the current year and the 3 following tax years. The new employee's tax code must be sent to HMRC using a Full Payment Submission (FPS) on or before the new employee’s first payday.
The required information usually comprises the employee’s:
- date of birth
- full address
- start date
The employee’s P45 can also provide the following information:
- full name
- leaving date from their last job
- total pay and tax paid to date for the current tax year
- student loan deduction status
- National Insurance number
- existing tax code
HMRC also needs to be sent information about tax and other deductions from employees’ pay when the employee is paid. This is done using the Real Time Information (RTI) system which involves employers sending HMRC information each tax month. Tax months run from the 6th of one month to the 5th of the next.