Recruiting your first employee: The tax and legal issues you need to know

Recruiting your first employee is an exciting milestone in the growth of any business. You can read tips for how to do it here.

While having employees is something to celebrate, there are tax and other obligations to be aware of. This guide outlines the key issues you need to know.

Register for PAYE

PAYE (Pay As You Earn) is the system used by the Government to collect income tax and National Insurance. When you become an employer, you will be required to register with HM Revenue & Customs (HMRC). Once registered you will get an employer PAYE reference number.

You must register before the employee’s first payday, although you cannot do it more than two months before you start paying people. The Government advises that it can take up to 15 working days to get your employer PAYE reference number.

Payroll

Payroll is the term used for the process of paying employees. You need to have a system in place, so staff receive their correct salaries including any commission. The process is also important for ensuring the correct deductions are made such as income tax, National Insurance and pension contributions.

You can run a your own payroll, but it can be confusing and time-consuming, and there are frequent updates to rates. For these reasons, it is often beneficial to outsource to a payroll provider.

TaxAssist Accountants provides businesses with access to a payroll portal. This allows you to easily manage employee working hours, store employee information and manage annual leave for staff. If you do not wish to use these online facilities, we can also offer a payroll service tailored to your needs.

National Insurance

National Insurance is a tax paid by employees, employers and the self-employed. It is used to fund certain state benefits and public sector services.

Employers must pay:

• Primary Class 1 contributions from employees’ earnings on their behalf
• Secondary Class 1 contributions on employees’ earnings
• Class 1A contributions on most taxable benefits and expenses

Employees have a category letter for National Insurance. Most are in category A, but there are other categories that might apply. The categories are explained here.

The amount employers must deduct from employees’ pay from 6th April 2024 to 5th April 2025 is confirmed on the HMRC website.

For full details on National Insurance, read this guide.

Pensions

Auto-enrolment rules mean employers must enrol eligible employees into a workplace pension scheme and pay into the scheme.

The minimum amount that must be paid into a pension scheme is 8% of an employee’s earnings. An employer must pay at least 3%, but you can choose to pay more.

Contributions are based on total annual earnings between £6,240 and £50,270 before tax. This includes salary, commission, bonuses, overtime, and pay for statutory leave.

A worker must be automatically enrolled into a pension scheme if:

• they are aged between 22 and state pension age
• they earn at least £10,000 per year
• they usually (‘ordinarily’) work in the UK

Employers can choose from several auto-enrolment pension schemes.

Employees who are not eligible for auto-enrolment can ask to be enrolled voluntarily. Employers may be required to make contributions. Employees who have been enrolled into a pension scheme can choose to opt out. They have one calendar month to decide if they want to opt out and get a refund of any contributions.

National Minimum Wage and National Living Wage

Employers are legally obliged to pay employees a minimum amount. The hourly rates are dependent on the age of the employee. The Government sets the rates each year.

From 1st April 2024, the following hourly rates apply:

National Living Wage (those aged 21 and over)	£11.44
18–20-year-old rate	£8.60
16–17-year-old rate	£6.40
Apprentice rate	£6.40

If HMRC finds that an employer has not paid the minimum or living wage, the penalties that can be imposed include:

• A notice to pay the money owed, dating back to a maximum of six years
• A fine of up to £20,000 and a minimum of £100 for each employee or worker affected.
• Legal action including criminal legal proceedings
• The names of the offending business and employer passed to the Department for Business and Trade. They might be published on a public list

Other employment law

There are various other employment regulations that apply to employers. They include:

Contracts: All employees are legally entitled to a 'written statement of employment particulars'. This includes areas such as job title, pay, working hours, holiday entitlement, sickness absence processes and pay, pensions, grievance and discipline.

Annual leave: Most workers who work a five-day week are legally entitled to paid holiday of at least 28 days a year.  

Health and safety: An employer is responsible for safeguarding the health and welfare of employees and managing workplace health and safety risks. Steps to take include conducting necessary risk assessments and eliminating or mitigating any risks. 

Need more help with taking on employees?

TaxAssist Accountants can refer you to Employmentor, which helps businesses manage employment law issues and fully comply with legal requirements.

Call 01225 464499 or complete our online enquiry form.

FAQs

What are the key finance and legal requirements for hiring in the UK?

Key legal requirements are:

• Register for PAYE
• Explore options to outsource your payroll function
• Meet your PAYE and NI requirements as an employer
• Ensure you are paying National Minimum and National Living Wage
• Comply with auto-enrolment
• Have contracts in place for all employees
• Offer annual leave in line with minimum requirements
• Have health and safety sorted
• Put in place employers liability insurance

What are the common pitfalls in the hiring process for first-time employers?

As well as meeting your finance and legal requirements, it is important to offer an attractive package for employees. This will not only help you when hiring but also when retaining employees. For more information on recruiting your first employee check out our article here.

When should you hire your fist employee?

As a business, you want to succeed so it is important to balance the

scales between growth and success. As your new business starts to thrive and you have more work you will need someone to help you. An employee will cost money so you may want to start off with a part-time employee until you know you have capacity to keep them busy. You do not want to be paying someone who does not have much to do.

Equally this employee will free up your time so you can be more productive and concentrate other aspects of the business. For other ways to free up some of your time, read our guide on becoming paperless.

Date published 18 Dec 2023 | Last updated 10 Apr 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

---