You have taken the leap and started up in business, good for you. It’s going well and you have reached the point of having to take on employees but what does that mean?
Running a Payroll
The main financial implication of taking on staff for your business is that you have to pay them. Depending how much you are paying may result in you having to manage PAYE as part of your payroll. PAYE (Pay as you Earn) is the governments way of collecting Tax and National Insurance contributions from employees at source. You, as the Employer, are responsible for making these deductions from your employees wages and paying it over to HMRC.
When you are budgeting for what you can afford to pay as a wage to your employees it is worth taking into consideration that for any employees earning over £8,628 a year you will have to contribute to that employees National Insurance contributions at a rate of 13.8% for every pound over £8,628. That means for every £1,000 above £8,628 you have an additional cost of £138 for that employee – you do not pay the employee this you pay it direct to HMRC.
Even if you are exempt from running a PAYE system you must still keep Payroll records for tax purposes and report to HMRC all payroll payments.
Keeping Payroll records involves recording what you pay employees and what deductions you make, you’ll also have to record employees leave and sickness absences. These records should be kept for a minimum of 3 years from the end of the tax year they were incurred as HMRC can ask to inspect them at any time.
At current rates if you have only one employee and are paying them the minimum wage for an average of only 13.5 hours a week you will probably have to run PAYE through your payroll. This however is only a guide, there’s more involved in determining if you are subject to PAYE so its worth speaking to an Accountant.
Before you take on any employees it is advisable to register with HMRC as an employer and obtain your Employers PAYE reference, this is required for the payment submissions you must make before or on every pay day. Obtaining this reference up front prevents any delay in your first submissions.
To run a Payroll you could purchase software and operate it by yourself however rates are regularly updated and there are numerous allowances and statutory payments that are changing (sometimes on an annual basis) so specialist help and advice could prove invaluable.
There is also the annual Employment Allowance for your Employers National Insurance Contributions that you should be sure and claim. This could result in a reduction in what you have to pay HMRC each year of up to £4,000 – speak to your Accountant!
As a registered employer you must also tell HMRC about any changes in your employees and their circumstances. For example if you take on a new employee or terminate an employment.
The PAYE tax month runs from the 6th of one month to the 5th of the next. Even if you don’t make a payment to your employees in a tax month you must still submit a report to HMRC telling them so.
Running a Payroll involves calculating the amount your employee has earned in the period (including basic pay, overtime and bonus’s) adding Statutory Payments and deducting any payments for HMRC, Student Loans or Earnings Arrestments. You then need to produce payslips for your employees and report to HMRC.
Before or on every pay day you must submit a return to HMRC detailing those payments – this is called Real Time Information (RTI). Should you have any deductions to reclaim from HMRC (such as Statutory Maternity Pay or Sick Pay) then an additional report must be submitted for this. You must also report on any new starts and leavers each period.
If you are subject to collect PAYE you will need to be aware of the current rates and earning bands to facilitate these calculations. This information can be found on the HMRC website.
By the 22nd of the month following payment you must pay over to HMRC any deductions that you have made from your employees wages along with your Employers National Insurance contributions. If you usually pay less than £1500 per month you can arrange to make payment quarterly instead of monthly. Whichever agreement you have ensure that payment is on time as failure can result in interest penalties at 3% daily and also penalties for late and partial payments.
In October 2012 the Government introduced Auto Enrolment which now applies for all employers. There is certain criteria and once your employees meet this criteria you must automatically enrol them in a pension scheme and contribute towards their retirement. There are significant penalties for not meeting your auto enrolment responsibilities so this should not be overlooked.
If you need any advice regards the financial implications of employing staff why not call for some free advice – 01236 723731
The rates and thresholds quoted in this article are correct at the time of writing.