Taking on your first employee - what you need to know

Introduction

Taking on your first employee is an exciting yet daunting task as it means you have added and new responsibilities. This guide is written to help you understand some of the new responsibilities and to help you avoid common pitfalls.

Carry out research

Employment law lays out many rules to protect employees and provide them with certain benefits. Most employees are entitled to holiday pay, notice periods, sick pay, parental pay, and more. You must also ensure you pay your employees at least the National Living Wage (NLW) or National Minimum Wage (NMW) for their age.

To attract the best talent you may wish to increase the amount of benefits that an employee has. Common examples of this include private medical insurance and increased holiday pay over and above the legal minimum.

Once you've decided on the pay and benefits you're willing to offer, we strongly recommend you capture this in a contract of employment to avoid employee disputes in the future. Within a contract of employment you can also add in terms that protect your business. An example would be increasing the notice period that employees must provide if they wish to leave your employment.

We recommend you carry out in-depth research on all of the above to get a clear idea of the time and cost of taking on your first employee. You may also wish to seek help from an employment lawyer or a human resource (HR) advisory firm to limit the risk of something going wrong.

Submit your registrations

Once you've carried out your research and are ready to hire your first employee, you will need to register as an employer with HM Revenue & Customs (HMRC). If you have an accountant they will typically do this for you.

After HMRC accept your registration they will provide you with two employer reference numbers that you will need to operate your payroll (we'll cover this further down the page). One is your Employer PAYE Reference Number and the other is your Accounts Office Reference Number. These reference numbers need to be kept safe and should only be shared with third parties under limited circumstances.

Next you will need to create an Auto-Enrolment pension scheme. The Auto Enrolment rules ensure that every employer offers the option to contribute to a pension scheme to all employees. Depending on how much each employee earns you as an employer may also have to contribute, increasing the cost of being an employer. Note - you must have a pension scheme in place even if all of your employees decide to "opt-out". Again your accountant can register the scheme on your behalf, however if you require a pension scheme that offers more than the bare minimum service that you need to be compliant, you may need to contact an independent financial advisor.

At TaxBoxx we only create pension schemes that are managed by the government organisation NEST, however we can operate your payroll no matter who you choose to manage your pension scheme. If you would like to discuss pension scheme options we have a panel of trusted financial advisors. If you are a client of TaxBoxx, please ask your accountant for more details.

Finally before you can take on your first employee you must ensure you have an employers liability insurance policy. As accountants we cannot advise you on what policy you need, however if you wish to discuss your options with one of our trusted partners please ask your accountant.

Gather employee information

When you have found the perfect candidate to join your team and you have submitted your registrations it is time to start the employee onboarding process.

Firstly (and perhaps most importantly) you need to check the employee's identification and right to work documentation. You must verify that the employee is who they say they are and that they have the legal right to work in the UK. If you need help with this process we recommend you speak to an employment lawyer or HR advisory firm.

Once you're satisfied with the above you need to gather personal information from the employee in order to operate payroll. This includes but is not limited to; their home address, date of birth and national insurance number. To collect this information we recommend you ask the employee to complete a HMRC starter checklist.

The HMRC starter checklist will ask the new employee whether they have had another job since 06 April. If the employee states they had another job since 06 April but no longer has that other job (option "B" on the starter checklist), you must request the employee's P45 given to them by their previous employer. Note - it may take a few weeks for the employee to receive their P45. If you have not received the employees P45 before the first pay date, don't worry, you can still operate payroll without it. Using the employees P45 allows you to accurately deduct the right amount of tax from their salary however it is not strictly necessary.

Operating payroll

Now you have all the registrations and employee information in place there's nothing left for you to do until just before your employee's first pay date.

Before you can pay your employee you need to calculate the Tax, National Insurance and pension contributions due on your employee's salary. After you deduct these taxes and pension contributions you arrive at the employee's take home pay for that period, whether it be a week or month. The take home pay is the amount you should actually pay direct to the employee. It doesn't matter if you pay the employee in cash, cheque or bank transfer so long as the employee receives their pay on your agreed pay date.

The employee's salary, tax, pension contributions and take home pay all need to be detailed on the payslip that you provide to your employee. Providing an employee with a payslip is a legal requirement.

Next, the information on the employee's payslip must be submitted to HMRC electronically on or before the pay date. Because of this we recommend you operate your payroll a couple of days before the pay date. HMRC use these submissions to calculate how much tax you need to pay them.

Finally you must submit your employee's salary and pension contribution information to your pension provider. Your pension provider uses this information to calculate the amount you need to pay them and to check that you're operating your pension scheme correctly.

At TaxBoxx we offer a payroll service where we take operating the payroll off your hands so you can focus on running your business. We charge competitive fixed fees starting at £15 plus VAT per month which covers up to 4 employees.

Paying the deductions

Every month you must pay the taxes deducted from your employees to HMRC. These tax deductions are referred to as PAYE. PAYE is usually due to be paid no later than the 22nd of each month. To read in more detail about paying your PAYE to HMRC take a look at our article Paying your PAYE to HMRC.

Just as you must pay PAYE to HMRC every month, you must also pay pension deductions to your pension scheme provider each month. The date your pension deductions are due to be paid can vary depending on how your pension scheme was set up. However the latest date is the 22nd of the calendar month following the month in which the pension contributions were deducted.

Example

Susan's business employs 4 members of staff all paid on the last day of each month. In March Susan pays each member of staff on the 31st March. The total PAYE due to HMRC for the salaries paid in March is £850, so Susan must pay the £850 PAYE to HMRC no later than 22nd April.

How you pay your pension contributions differ depending on who your pension scheme provider is. If you are unsure how to pay, we recommend you contact your pension scheme provider directly.

In summary

There is a lot of information in this guide and we appreciate it can seem overwhelming. The good news is a lot of this work only needs to be carried out once for you to become an employer. You only need to register with HMRC and create a pension scheme once for example.

The ongoing work (operating payroll) can be outsourced if you're not confident that you can fully manage the process or prefer to spend more time on running your business.

We hope you have found this guide useful but as always feel free to get in touch if you have any queries.