How to Become an Employer: Part 1 – Tax and Financial Implications

Your venture is growing and you haven’t had a weekend since you had the idea for the business. Perhaps it’s time to hire some staff, but do you know the legal and financial implications of becoming an employer? We explain your basic obligations in two short articles.

How to Become an Employer: Part 1 - Tax and Financial Implications

As an employer, you must register with HMRC and sign up for PAYE. PAYE is the government system via which you manage your tax obligations to your employees. As an employer, you are responsible for deducting your employees' own National Insurance contributions (NI1), income tax, auto-enrolment pension contributions, and student loan repayments from their pay.

You must produce monthly or quarterly payslips for employees, showing the breakdown of deductions from their salary, but not your own additional payments, such as your own employer’s National Insurance contributions (NI2) and pension contributions.

NI1, income tax, employee’s pension contributions and student loan repayment rates all vary, but as they are deducted from employees’ salaries which are at your discretion, in this article we will focus on payments you must make in addition to their salaries, to help you understand the cost of being an employer.

Employers National Insurance

Employer’s national insurance (NI2) contributions of 13.8% must be made on earnings above the primary threshold (PT) of £155 per week. What most people don’t realise is that while in the short term this inflates the cost of employing someone and can play havoc with your cashflow, in the long-run you will get this back, and more, at the end of the tax year; salaries reduce your profits, which reduces your corporation tax bill. The table below shows the cost of an employee is lower than their salary. (Other costs such as employers’ auto-enrolment contributions, insurance and increased administration not included.)

It’s clear to see why so many businesses rely on many part-time staff, as the tax savings make it very cost-effective. 10 staff at £5200 per year will save you roughly £1300 per year in comparison to 5 at double the salary. If going for part-timers, decide whether you mind high staff turnover, or want loyalty; many will leave if they want a break or find a full-time position, whereas, if you treat them right, those with real reasons for needing part-time work, for instance mums, will stay forever. However, treating someone ‘right’ generally involves annual pay rises.

NI Exemptions

Employers’ NI is not liable on workers under 21, or on the first 10 employees during your first 2 years of business. If lots of your time is taken up with unskilled labour, giving younger workers a leg-up on the work ladder could be a good idea. It might seem money will be tightest when you’re starting out, but this is when employees are most tax-efficient, and it could mean the difference between success and failure.

Minimum Wage

Most workers are eligible for minimum wage, and the rate depends on their age. Aside from knowing the rate, if you’re really trying to keep your costs down, it’s a good idea to be aware of how many hours your employees can work at minimum wage without incurring NI.

See who’s eligible.

Pensions

It is becoming a legal requirement for employers to make contributions to their employees' pensions. Employers’ minimum contributions begin at 1% of annual salary, rising to 3% by October 2018.

Doing everything yourself is never advisable, and rarely possible in the long term. Employees probably aren’t as expensive as you might have thought, and good staff can help your business reach the next level.

However, if taking this step, you must also be aware of your legal obligations. Luckily, we’ve summed-up these for you too in Becoming an Employer: Part 2 - Legal Implications.