Setting up as an Employer: Costs & Responsibilities

If you are ready to employ staff, or you are a Limited Company, and you wish to payroll yourself as Director through a PAYE scheme, then you need to set up as an Employer with HMRC.  Registering as an employer brings about reporting and pension responsibilities.

• To set up as an employer, follow the steps on HMRC’s website. https://www.gov.uk/register-employer  

• If you are a Sole Trader business, you only need to do this if you are employing people other than yourself in your business.  

• If you are just yourself operating in the business and are a sole trader, you do not register as an Employer.  

• If you have a Limited Company and wish to payroll yourself as a Director, then you DO need to register as an Employer.

Once you have registered, you will receive two codes from HMRC: PAYE Reference and Accounts Office Reference.  Keep these - you need them!  

Once you have these, add your Employer scheme to your online Government Gateway account.  Login to Gov Gateway, click “Add a tax to your account to get online access to a tax, duty or scheme”, and follow the instructions to add your PAYE Employer Scheme.

Software:

You need to use suitable payroll software to run your payroll physically every pay period and submit reports to HMRC.  HMRC offers free payroll software called Basic Tools, which fulfils the legal requirements.  It does NOT produce payslips, however.  Accounting software may have a payroll add-on that you can use.  You can also outsource payroll to a suitable provider, saving you the need to have software.

HMRC Reporting Obligations:

Every pay period, you are required to submit a report to HMRC that advises the Revenue of the details of that period's payroll figures and employees.  This is submitted via your Payroll software and is usually a click of a button.  Should you pay employees on an Ad Hoc basis, if you have a period where you are not paying any staff, you must still submit a report to confirm Nil payments for that pay period.

Pension Obligations:

Every employer in the UK is required to set up a suitable workplace pension and report to the Pension Regulator on the scheme in place.  Your legal obligations commence the day your first member of staff starts work.  There is an exception to this for small Ltd companies that only employ Directors; see below.

• If you are a small Limited Company and only employ Directors with no employment contracts, you may be exempt from pension obligations.  You must inform the Pension Regulator that you are not considered an employer according to their definition of what an employer is.  See here for more information. https://not-employer.ae.tpr.gov.uk/

• For all other businesses, you have a requirement to:

• Have a suitable workplace pension in place

• Complete a Declaration of Compliance report to the Pension Regulator within the first 5 months of employing your first member of staff

• Complete a Re-declaration of Compliance to the Pension Regulator every 3 years thereafter.

Employee/Employer Obligations: 

If you are a Director of your own Ltd Company and do not have a contract of employment, then some of these points do not apply to you. Those points are asterisked as (*)  

• You must have Employers Liability insurance to employ staff

• You are legally required to provide your employee with a payslip for every pay period. Most payroll software will provide you with this in a legally compliant format.

• Employees must be paid at least the National Minimum Wage for their age.  There is no negotiation on this.  If you pay your employees on a ‘per piece’ basis or commission-only basis, the total Gross pay divided by the hours they worked for the period must be equal to or exceed the National Minimum Wage.  (*)

• You must provide every employee who was employed with you on 5th April with a P60, an annual report on what they earned for the previous tax year. Your payroll software will likely produce this very easily. This must be provided to employees by 31st May after the tax year ends.  

• Any leavers should be provided with a P45 after their leaving date.

• All Employees, irrespective of the number of hours worked or contract type (permanent, fixed term, seasonal, zero hours), are entitled to paid holidays. Accrual of holidays begins on Day 1 of employment. (*)

• All Employees are entitled to a written employment contract from the 1st day of their employment. (*)

• If your employee is eligible for certain Statutory Payments, e.g. Statutory Sick Pay, Maternity or Paternity Pay, or Parental Pay - you must provide this.

Costs

OK, so now to the costs!  Your main costs are:

Gross Salary + Employer Pension Contribution + Employer National Insurance.

(Gross Salary is the amount you advertise the job as, i.e. £30,000 per annum before any employee PAYE or NIC is deducted).

Calculating Employers Pension

You can calculate pension contributions on all pay or qualifying pay.  Qualifying pay only calculates pension contributions on a portion of the employee’s pay.

The Employer pays a minimum of 3% in pension contributions.  

If you are going to calculate all Earnings, then simply work out what 3% of the gross salary is to get your cost.  So, £30,000 per annum salary will cost you an additional £900 per annum (£75 per month) in employer pension contributions.

For Qualifying earnings, current rates are:

• Weekly: the first £120 is not pensionable.  Anything over £967 is not pensionable.

• Monthly: the first £520 is not pensionable.  Anything above £4189 is not pensionable.

So, the same example of £30,000 per annum equates to £2,500 per month. £2,500 is less than the upper limit of £4189, so you don’t need to worry about the upper limit. As the first £520 is not pensionable, the calculation is £2500-£520 = £1,980 pensionable pay. 3% of the pensionable pay is £59.40 per month (£712.80 per annum).  

Should the monthly salary EXCEED the upper limit of £4189, your calculation ignores any pay above £4189 and is simply £4189-£520 = £3669 pensionable pay.

Employers National Insurance

Many employers are eligible for Employment Allowance, reducing your employer's National Insurance costs.  You can check if it applies to you here. https://www.gov.uk/claim-employment-allowance/eligibility  If you do, the first £10,500 of your annual Employers NI is not paid. For small companies employing only a few staff, this may result in you having No employer NI to pay at all. 

As a quick reminder, if you are a sole Director of a limited company and only employ yourself, you are NOT eligible for Employment Allowance. 

If you are not eligible for Employment Allowance, or have a large payroll and will have some employers NIC to pay after you’ve utilised your Allowance, the calculation is:

Annual Cost or Monthly Cost

Gross Annual Salary less £5,000 x 15% Gross Monthly Salary less £417 x 15%

For our previous example, 

Annual:

£30,000-£5,000 = £25,000, 15% of which is £3,750.

Or 

£2,500-£417 = £2,083, 15% of which is £312.45

So, total cost for the employee on £30,000 is

Gross Salary: £30,000

Pension: £712.80 (qualifying earnings)

Employers NI: £3750

TAnnual Cost: £34,462.80

Noting that if you are eligible for Employment Allowance, this may reduce or fully negate the NI cost altogether.

Other Costs & Considerations

In addition, you may on occasional be required to pay your employee Statutory Payments.  Statutory Maternity, Paternity, Adoption, Parental Bereavement and Shared Parental Pay is usually reclaimed from HMRC.  However, any Statutory Sick Pay paid to an employee is not reclaimed and is a cost to your business.  

Should you decide to offer employees benefits such as gym memberships, health care or use of a company car - this also incurs a cost for you.  In addition to the cost of the provision of the benefit, you will be liable for Class 1A National Insurance contributions.  Employment Allowance does not reduce your Class 1A NICs.