Tax Considerations when Employing People

9 minutes


When expanding your team for the first time, it's important to address key tax considerations such as workplace pension enrolments. Our guide outlines the steps to take to ensure you remain legally compliant and financially efficient when employing people.

Having successfully formed and registered your limited company, established your trading operations, and organised your financial records, you are ready to expand your team and hire your first employee. When employing staff for the first time, there are several things you need to think about and do:

  • Decide how much you would like to pay someone (this must be at least the current minimum wage).
  • Ensure someone has the legal right to work in the UK.
  • Confirm whether you must apply for a DBS check (industry and role dependent).
  • Take out Employers’ Liability Insurance – employment insurance is mandatory as soon as you become an employer.
  • Send details of the role in writing to your employee, including any terms and conditions, with a written statement of employment if the contract is longer than one month.
  • Inform HM Revenue and Customs (HMRC) of your new hire by registering as an employer. This can be done up to four weeks before paying new staff for the first time.
  • Automatically enrol your staff into a workplace pension scheme.

Our flexible Payroll Services for small and medium-sized businesses ensures that your employees get paid accurately and on time every month. This service will save you time and ensure you are legally compliant when hiring new team members.

New Starter Checklist

As an employer, ensuring accurate employee information is crucial for calculating and deducting the correct amount of tax and national insurance through the PAYE payroll system. The government has introduced a new starter checklist to facilitate this process and obtain the necessary details from your new employees.

The new starter checklist serves as a valuable resource for your new employees, providing them with guidance on the information they need to provide. It enables you to effectively manage their tax liabilities in preparation for their first paycheck. By utilising this checklist, your employees can provide the essential information required to establish accurate tax and national insurance deductions.

Access to the correct employee information allows for smooth payroll administration, ensures compliance with tax regulations, and helps prevent potential discrepancies. By utilising the new starter checklist, you and your employees can work together to ensure the accurate calculation of taxes and national insurance contributions, ultimately contributing to a seamless and transparent payroll process.

Right to Work in the UK

When hiring employees, verifying their right to work in the UK is legally required. This verification process entails assessing the type of work they are permitted to undertake and the duration of their eligibility to work in the country if any limitations apply. It is crucial to conduct right-to-work checks for potential employees to prevent any risk of employing an individual without proper authorisation, which could lead to legal consequences.

By diligently checking each applicant’s right to work in the UK, you ensure compliance with the law and mitigate the possibility of inadvertently employing an illegal worker. These checks safeguard your business from potential penalties and legal repercussions.

Checking the right to work of potential employees serves as a necessary step to protect your business. By conducting these checks, you can confidently build a reliable and legally compliant workforce, contributing to the success and stability of your company.

Running Payroll – Produce Employees Paycheck

After successfully welcoming new employees to the company, the subsequent step is generating their first paycheck. If you have chosen to handle payroll independently without the assistance of an accountant, it is crucial to understand the necessary deductions that must be made before issuing payment. These deductions primarily encompass tax and national insurance contributions.

By ensuring the accurate calculation and deduction of taxes and national insurance, you fulfil your obligations as an employer and maintain compliance with regulatory requirements. Understanding the intricacies of these deductions enables you to manage payroll effectively and guarantee that your employees receive their wages accurately and in accordance with legal obligations.

To determine the correct deductions, it is essential to know an employee’s tax code and national insurance category letter. These factors play a role in calculating the appropriate amounts to withhold. This section of our guide provides comprehensive coverage of all the potential deductions that need to be considered for PAYE (Pay As You Earn) purposes, including:

  • Income Tax Rates.
  • Employee National Insurance Contributions.
  • Employer National Insurance Contributions.
  • Pension Auto-Enrolment.
  • Student Loan Contributions.
  • Other Statutory Deductions.

Income Tax Rates

As an employer, it is your responsibility to deduct the appropriate amount of income tax from your employees’ salaries on behalf of HMRC before distributing the payments to them. It’s important to note that income tax rates and brackets can vary annually, and employees are liable to pay a specific percentage rate depending on their earnings. Typically, this can range from 20% to 45% of their earnings once their income surpasses the threshold of their Personal Allowance. By deducting income tax correctly, you fulfil your obligations as an employer and facilitate your employees’ accurate payment of taxes.

To stay informed and ensure accurate deductions, it is recommended to refer to the latest income tax rates and tax brackets. Our guide provides access to the most up-to-date information regarding income tax rates, ensuring you remain compliant with the prevailing tax regulations and guidelines.

Employee National Insurance Contribution

As an employer, it is also mandatory to deduct National Insurance contributions from your employees’ salaries before distributing the payments to them. The specific amount to be deducted is determined based on various factors, including the employee’s employment status, age, national insurance category, and earnings. The National Insurance contribution is calculated by the applicable rates and thresholds corresponding to the employee’s circumstances.

Staying informed about employee National Insurance contributions is essential to ensure accurate deductions and compliance with regulatory requirements. Find out more about employee National Insurance contributions in our Tax Rates article, which provides valuable information on this topic, helping you understand the intricacies of calculating and deducting National Insurance contributions from your employees’ salaries.

Employer National Insurance Contribution

As an employer, it is important to note that you have an additional obligation to pay an Employer National Insurance contribution in addition to the National Insurance contribution paid by the employee. The specific percentage rate you must pay depends on the employee’s National Insurance category and their monthly earnings.

Staying informed about the applicable rates and thresholds is beneficial to ensure compliance with legal requirements and accurately calculate the employer’s National Insurance contribution. Find out more about employer National Insurance contributions in our Tax Rates article, which will help you to manage payroll effectively, ensuring compliance with legal obligations while fulfilling your role as an employer.

Pension Auto-Enrolment

As the owner of a limited company, it is a legal requirement for you to enrol eligible employees into a workplace pension scheme. This scheme involves deducting a small percentage of your employee’s wages, which is then contributed to a pension fund. To enhance the value of the employee’s retirement savings, additional contributions are made by both you as the employer and the government.

Complying with auto-enrolment obligations and managing the entire pension scheme process can be complex and time-consuming. Our Auto Enrolment and Workplace Pensions service is designed to assist you and help to alleviate the stress associated with these responsibilities. Our dedicated service streamlines the auto-enrolment process and reduces administrative burden. We handle the complexities involved, enabling you to focus on other aspects of your business with the confidence that your auto-enrolment obligations are being effectively managed.

Student Loan Contributions

As an employer, it is essential to fulfil your responsibility of deducting any applicable student loan contributions from your employees’ salaries before issuing payment. An employee’s income and student loan plan type determine the amount to be deducted.

Student loan deductions are an integral part of the payroll process, ensuring that employees meet their obligations towards repaying their student loans. Staying up to date with the details of student loan deductions allows you to manage payroll effectively, ensuring that your employees fulfil their obligations while maintaining legal compliance.

Our Payroll Service is designed to streamline the payroll process, including the deduction of student loan contributions. By utilising our service, you can be confident that the correct amount will be deducted from your employees’ salary, ensuring compliance with the relevant requirements and accurate payroll processing.

Other Statutory Deductions

As an employer, it is essential to be aware of additional deductions that may need to be made from an employee’s paycheck. Two common examples of such deductions are court orders and child maintenance payments.

Court orders come into effect when an individual has outstanding payments to make in relation to a specific case. As an employer, it is your responsibility to deduct the specified amount from the employee’s paycheck and ensure timely payment to the appropriate party.

Child maintenance payments are another type of deduction that may be required. These payments are made to support the financial well-being of a child. As an employer, you are responsible for deducting the agreed-upon amount from the employee’s paycheck and forwarding it to the child maintenance service or the designated recipient.

By accurately deducting any required additional deductions from your employee’s paycheck, you fulfil your obligations as an employer and contribute to the proper resolution of financial obligations. To ensure compliance, it is essential to stay informed about any specific rules or requirements associated with these deductions.

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