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If you are a small business or start up wanting to employ staff in the UK for the first time, then registering as an employer can seem like a long and confusing process. Fortunately, the correct application procedure is fairly simple when you know what steps to take with HMRC, pensions and legals. This article provides an overview of the key steps you will need to complete before and after hiring an employee.
When do you need to register with HMRC?
To hire an employee in the UK, you will need to register with HM Revenue and Customs (HMRC) as a new employer if the employee:
- will earn more than £120 a week
- will receive a pension or has another job while still working for you
- will receive expenses or benefits
You can register online on gov.uk if you are a limited company. When you register, HMRC will ask for your company name, business address, unique taxpayer reference, the number of employees you expect to employee and whether you intend to offer benefits. After completing the employer registration form, you will receive an employer PAYE reference number which will allow your to run payroll and communicate with HMRC about salary payments and national insurance contributions. Your HMRC account will also store your full payment submission history.
What is PAYE?
Pay as you earn (PAYE) is HMRC's system for collecting Income Tax and National Insurance from employment. PAYE can be paid on a monthly or quarterly basis depending on your expected PAYE bill. The payroll software you use to pay your employees will work out each employee’s tax and national insurance contributions based on their salary, national insurance number and pension contributions. The payroll software will also export this information to HMRC automatically. You will also need to register with PAYE if as an employer if you intend to employ yourself, even if you are the sole director of the limited company.
When do employers need to set up a workplace pension?
In the UK, employers have to set up a workplace pension and automatically into the pension scheme and make contributions to their pension if all of the following apply:
- the employee is classed as a worker
- the employee is aged between 22 and the state pension age
- the employee will earn at least £10,000 per year
- the employee usually works in the UK (read the detailed guidance if you’re not sure)
This means that the automatic enrolment applies to both full-time and part-time employees.
How do you calculate the state pension age?
An employee can determine their state pension age using the government's online calculator. However, to qualify for a state pension, the employee will usually need to have paid national insurance contributions for at least 10 years.
Who is classified as a worker?
Anyone who meets the following criteria is classified as a worker:
- works under a contract of employment (an employee), or
- has a contract to perform work or services personally and is not undertaking the work as part of their own business.
This means that a director of a limited company with no employees is not classified as a worker if they do not have an employment contract with the company. This also means that multiple directors with no employment contracts and no employees will not be classified as workers. Volunteers won’t be classified as workers either unless they are paid or receive a non-financial benefit. Being classed as a worker or not will therefore impact a person’s eligibility for a pension.
IR35 and Avoiding Employee Misclassification in the UK
Avoiding employee misclassification in the UK requires adherence to the IR35 legislation, which aims to distinguish between independent contractors and employees for tax purposes.
Being "inside IR35" means HM Revenue and Customs (HMRC) deems an individual as an employee for tax and National Insurance contributions, despite being contracted as a freelancer or consultant.
To ensure compliance, businesses must evaluate contracts and working arrangements against IR35 criteria, considering control, substitution, and mutuality of obligation. Conducting regular IR35 assessments and consulting with legal experts can help clarify a worker's status in the UK and prevent misclassification.
How do you set up a workplace pension?
To set up a workplace pension, you will need to choose a pension provider. You will usually need to pay a set up fee. Once you have established your workplace pension, you will need to contact the Pensions regulator to inform them about your workplace pension. You will also need to communicate information about the pension scheme to your employees and determine their respective contributions.
What is employer's liability insurance?
Since the Employers' Liability (Compulsory Insurance) Act 1969, employers must get Employers’ Liability insurance as soon as they become an employer and the policy must cover the employer for at least £5 million and come from an authorised insurer.
How to find and hire employees?
It is important to find candidates who are likely to fit in well with your organisation and existing team members. You can determine the fit of prospective hires through interviews with yourself and existing team members.
When do you need an employment contract?
Once you have satisfied your HMRC, pension and insurance duties, you will need an employment contract to formalise the terms of your employer-employee relationship. Whilst it might not seem necessary, employment contracts help protect your intellectual property and confidential information and prevent unwanted situations such as client solicitation immediately after employment termination. Before creating an employment contract you might want to first agree on the key terms such as the position and salary in a formal offer letter.
Do you need an employment contract for a part-time employee?
You should have an employment contract with all your employees, even if they are working part-time or for a fixed term. This is important to protect your company’s intellectual property and ensure the employee and the employer understand each side’s rights and obligations.
How do I create an employment contract?
Employment contracts should not be downloaded and edited from the internet as this is error-prone and does not guarantee that the final contract will contain everything an employment contract needs to be robust yet fair. A smarter approach is to use an online contract builder like Legislate which will create your custom employment contract by asking you simple questions.
About Legislate
As a CEO, you know how important it is to streamline your business operations and protect your assets. With Legislate, you can easily create bespoke contracts that are tailored to your specific needs without the need for expensive legal fees. Additionally, our platform allows you to extract important data from legal documents, helping make informed decisions faster. With Legislate, you can have peace of mind knowing that your contracts are legally sound and in good order. Book a demo or sign up today to put the confidence back into contracting.
The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.
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