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Paying an employee as a self-employed sole trader

As your sole-trader business grows you may find that you need help. Maybe you need someone to help with the administration, so you can concentrate on paying work and take your evenings and weekends back, or maybe you need another pair of hands at the coal-face. Whatever the reason, there are a lot of things to consider before you take on an employee.

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Make sure you can afford to become an employer

When you take on an employee, their salary is not the only cost. You’ll also have to pay employer’s National Insurance Contributions, make employer’s contributions to their workplace pension, pay for appropriate insurance and you’ll potentially have sick pay and maternity/paternity pay to cover at some point. You may also want to engage a payroll provider to run payroll for you. Before you start, it’s important to make sure your business can cover these costs.

You must ensure that your employee’s salary is at least the national minimum wage for the hours they work, but depending on the skills and experience you need them to have, you might have to pay more.

National minimum wage:

Year£3.90 25 and Over 21 to 24 18 to 20 Under 18 Apprentice
April 2019 £8.21 £7.70 £6.15 £4.35 £3.90
April 2020 £8.72 £8.20 £6.45 £4.55 £4.15

Be aware of your health and safety obligations

You don’t have to have a formal health and safety policy until you have five or more employees, but you are required to provide your employees with a safe and secure environment to work in. You should take some time to consider the risks your employee will face at work. The health and safety executive site is a good place to start.

Recruiting your employee

Obviously, you’ll want to come up with a recruitment process that satisfies you that you’ve found the right person, but you also have some legal obligations as an employer when you recruit an employee.

Applicant checks

You’ll need to make sure your employee has the right to work in the UK. Take a copy of the appropriate documentation and keep it on file. For UK citizens, a passport or other ID and proof of their NI number will be enough, for EU citizens you’ll need a passport or ID card, and for citizens of other countries you’ll need their passport and work visa.

Depending on the work they’ll be doing, you might need to carry out a DBS check. This will always be required if they’ll be working with children in any capacity. It’s advisable to check any references they give you during their application as well.

Contract of employment

All employees must be provided with a contract of employment, outlining the employee’s rights, responsibilities and working conditions. This doesn’t have to be a formal written document, although all employees are entitled to a written statement of employment within two months of starting work.

Gather employee information

Before you can pay your employee, you’ll need to gather certain information from them, and it makes sense to do this as part of your “on-boarding” process.

You’ll need your employee’s:

  • date of birth
  • gender
  • full address
  • start date

From your employee’s P45, you’ll need their:

  • full name
  • leaving date from their last job
  • total pay and tax paid to date for the current tax year
  • student loan deduction status
  • National Insurance number
  • existing tax code

If they don’t have a P45 you’ll need to get them to complete a starter declaration, which replaces the old P46.

Paying your employee

As you might expect, there’s more to paying an employee than just giving them money. Once again you have a number of legal obligations as an employer.

Register as an employer

You’ll need to register with HMRC as an employer before your employee’s first payday. It can take up to five working days to receive your PAYE reference number, which HMRC use to identify you as an employer, but you can run payroll before you receive it.

Running payroll

You can either choose to run payroll yourself, using payroll software, or you can engage a payroll provider to do this for you.  If you choose to use a payroll provider, it’s important to choose carefully as you are still legally responsible for ensuring all payroll tasks are completed correctly.

If you choose to run payroll yourself, you’ll need to use HMRC recognised software, which will be capable of reporting PAYE information to them in real time (RTI). You can find examples of free recognised software on HMRC’s website. Whichever software you choose, it should also be capable of producing payslips, recording pension deductions and making pension payments.

You must supply your employee with a payslip, which should include details of their gross pay, their net pay, deductions for income tax and NICs and any other deductions, for example for pension contributions.

Reporting to HMRC

You will have to report payroll figures to HMRC through RTI each time to pay your employee. Your recognised payroll software will be able to do this for you, and should lead you through the process.

Pension Auto-enrolment

All UK employers are now required to provide and contribute to a workplace pension for their employees, as long as they are at least 22 years old and earning £10,000 per year. At the time of writing the minimum total contribution is 8% of their qualifying earnings, with at least 3% being contributed by you. You must enrol your employee onto a pension scheme, though they can choose to opt out once they’ve been enrolled. You must not, in any way, encourage them to opt out.

Employer’s insurance

It’s important to make sure your business has suitable insurance in place to protect you and your employee. As a minimum you’ll need employer’s liability insurance, which will protect you if your employee has an accident at work. You may already have professional indemnity and public liability insurance for yourself, and you might want to extend your cover to include your employee.

Accounting for the costs to your business

Generally speaking, the costs of employing someone will count as legitimate business costs and can be deducted from your profits for tax purposes. This will include their salary, employer’s NI contributions, pension contributions, insurance and statutory payments like sick pay and maternity/paternity pay. Your accountant will be able to advise you in detail about your specific situation.

If you have any questions or if we can help in any way, please call our expert team on 01296 468 483 or email info@orangegenie.com.

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