Adding to your team is a big decision regardless of whether it’s your first employee, or your fiftieth. There are plenty of things to think about when taking on a new employee, from helping them settle in, to putting a comprehensive induction in place. However, your first job when hiring a new employee is always to make sure you are payroll compliant.
As you are probably aware, employers are responsible for the deduction of income tax and National Insurance contributions from their employees before they are paid. ‘Pay as You Earn’ (PAYE), as this process is known, brings a number of obligations you must meet. Failure to get the necessary information across to HMRC accurately and on time can lead to penalties being charged.
Employer’s PAYE responsibilities
The following is an overview of how the PAYE system works:
- Registering as an employer
You will need to register as an employer with HMRC as soon as you start employing staff or using subcontractors for contractor work. The registration process can take up to two weeks, and you must have registered as an employer before an employee’s first day.
Answer the questions in this eligibility guide to find out if you need to register.
- Setting up employees
Once you have registered your business with HMRC you will receive guidance notes which explain the steps you need to take to add an employee to the payroll. You will need the following information:
- The employee’s salary and employment information
- The employee’s tax information
- The employee’s bank account details
- Opening balances for the employee’s pay and taxes
Every time you pay an employee you must provide them with a payslip on or before their payday to show:
- Pay before any deductions (gross wages)
- Deductions like tax and National Insurance
- Pay after deductions (‘net’ wages)
Payslips can also include information like the employee’s National Insurance number, their rate of pay, their tax code, and their total pay and deductions so far in the year.
- Real time information (RTI) submission
Every time you pay your employees there’s certain information you have to submit to HMRC. You’ll need to do this by completing a Full Payment Submission (FPS) on or before the day the employee is paid.
The FPS information includes:
- Employer registration details
- Personal identifiable details for each employee
- Employment details for each employee
- Year to date figures for each employee
- Figures for the relevant period
- Payments to HMRC
You have to pay your PAYE bill to HMRC by the 22nd of every month. This payment will include the tax and National Insurance (and any other deductions) you owe as reported on your Full Payment Submission for the previous tax month. This includes:
- Employee income tax deductions
- Class 1 and 1B National Insurance contributions
- Student loan repayments
- Construction Industry Scheme deductions
- Annual returns – P60 and P11D
Employers must also provide employees with a P60 by 31 May following the end of the tax year. This shows the employee how much tax they have paid on their salary during the tax year. The employee will need this form when applying for tax credits, claiming back overpaid tax and when applying for a mortgage or a loan.
If an employee receives ‘benefits in kind’ such as a company car or an interest free loan, a P11D will need to be sent to HMRC. This must be received by 6 July following the tax year.
What other issues should you consider?
- Auto Enrolment
The rules for workplace pensions are changing. Workplace pensions are being phased in over a number of years and will result in employers having to make company pension contributions on behalf of their employee. Please take a look at our auto enrolment article for more information on this subject.
- Employee Expenses
If your employees are going to incur expenses while performing their duties, it is important that you have the right software in place to manage this process efficiently. We recommend using Xpenditure or Expensify, as this allows for a paperless and real time process.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out prosper.accountant to learn more about how we can help your business.