What You Need to Know if You Become an Employer

Becoming an employer represents a huge milestone in the development of any business. Whereas in the past, you simply had to worry about your own affairs, suddenly you have responsibility for other people, and you need to meet many legal and regulatory requirements. Among other responsibilities, you'll have to comply with tax legislation and employment law and report to HMRC how much you pay your staff and deduct from their salary. So, what do you need to know in order to take on your first employees without any hiccups?

Finding the right staff

Once you decide you need extra support, the first step will be to advertise the role and find the right candidate. To do this, you'll need to be clear on the job title, responsibilities, and salary to attract suitable people. Once you've found that person, several checks need to be carried out to ensure you can employ them. Firstly, you must ensure they have the right to work in the UK. You can do this by checking online if you have their right to work share code, or you can request their original documents. For British and Irish citizens, this could be as simple as checking their passport is valid and making a precise copy for your records. For other nationalities, it will depend on their status, and further documentation may be needed.

Depending on the nature of your business, you may also need to apply for a DBS check to be conducted. This will be the case if your business works with vulnerable people or in security, for example. 

Register as an employer

Assuming you'll be paying your employers more than the £123 lower earnings limit for national insurance, you'll need to register as an employer with HMRC before the first payday. It can take up to five working days to get your employer PAYE reference number, but you cannot register more than two months before you start paying people. If you don't get the number in time, you can still run payroll, just store the complete payment submission and send a late full payment submission to HMRC.

Most limited companies can register as an employer online, although if none of the directors have a UK national insurance number, you'll need to register by phone or post.

If you're a sole trader or a partnership with 2-10 partners and you have an online HMRC account, you can enrol for PAYE via this account. For partnerships with 11 or more partners, you'll need to contact HMRC by phone.

Once you're registered, you'll also get reminders from HMRC about key dates, such as reporting deadlines.

Employers' liability insurance

As soon as you become an employer, it's also compulsory to take out employers' liability insurance. This will help you 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. You can be fined £2,500 for every day you're not insured, so don't leave this one until the last minute.

Employment contracts

As an employer, you must provide every staff member with an employment contract outlining their responsibilities, rights and working conditions. Employment contracts should include job title, pay, work hours, included benefits, holiday leave, employment start date and notice periods. 

You must also provide a written statement of employment particulars to anyone who will be with you for a month or more. This sets out the conditions of employment and includes a principal statement to be given on the first day of employment and a wider written statement, which must be provided within two months of the start date. The principal statement should include key information such as hours, payment terms, probation period and work location. The wider written statement should include information about pensions and pension schemes, any right to non-compulsory training provided by the employer and disciplinary and grievance procedures.

Indeed, since 2012 every employer must enrol certain staff into a pension scheme and contribute towards it. Originally auto-enrollment applied to large employers with more than 120,000 employees however the scheme was eventually expanded to include small businesses with 30 and under employees in 2016.

If you are taking on employees aged between 22 and state pension age who earn at least £10,000 a year and normally work in the UK, you will need to set up a workplace pension scheme. 

Salaries and benefits

You will have agreed the salary with the employee before they took the job. As a minimum, this must be the National Minimum Wage of between £4.81 and £9.18 for employees under 23 years of age and the National Living Wage of £9.50 for employees aged 23 and above. 

You will also need to confirm payment frequency. This will usually be weekly or monthly, whichever works best for your business.

You may want to supplement this salary with non-cash benefits, such as childcare vouchers or a Cycle to Work scheme. If you decide to offer non-cash benefits in exchange for a salary reduction, you'll need to comply with the rules for salary sacrifice and file a P11D form by 6 July each year to declare any non-cash benefits you provided in the previous tax year.

Set up payroll

Now you have an employee on an agreed salary; you need to have a system in place to ensure they're paid on time, and you fulfil all the associated obligations. You may decide you have the capacity to do this yourself or prefer to outsource it to a payroll operator or accountant. Accounting software will help here, automating and simplifying the process. Look for a solution that helps you stay compliant and allows you to quickly create reports for HMRC. Software will also help you to maintain accurate tax records - you are legally required to keep proper tax records for six years.

Employer's national insurance

Once you start taking on staff, you'll also need to factor in employer's national insurance. As of April 2022, this is 15.05% of the amount an employee earns over and above the secondary threshold of £758 per month (£9,096 per year). You won't have to pay the employer's national insurance on the wages of any staff members who are under 21 unless you pay them more than £967 a week.

It may also be possible to reduce your annual national insurance liability by up to £5,000 through the Employment Allowance.

If you're self-employed read our guide to national insurance for self-employed.

Maintain accurate records

As you begin to take on staff, you also need to ensure you're accurately recording their details and keeping these files updated. This will help to ensure you are paying them correctly. You could also be asked to supply these records to your employee, their union/representative, or a regulator, so it's important that they're maintained. They must be kept for at least six years after the employee has left.

Each file includes their name and contact details, emergency contact, a signed copy of their employment contract, tax details, and preferred payment method.

Dos and don'ts for first-time employers 

Do:

• Check your preferred candidate has the right to work in the UK
• Familiarise yourself with your obligations as an employer, such as providing a pension scheme, workers' rights to holiday and sick pay, and the like
• Ensure you have the right insurance, documentation and systems in place, so your employees are safe and paid correctly

Don't:

• Ask any questions in the interview that could be used to discriminate against the candidate, such as details about their religion, age or marital status.
• Don't be vague about important details such as salary, contract terms, etc. It's important to have all the information a candidate needs to make an informed decision before starting interviewing.
• Don't forget to register with HMRC as an employer to get your employer's PAYE reference number.
• Don't leave it too long to get your new employee to sign their contract. Ideally, it should be before they start the role or within their first week.