How to Get “Tax Ready” To Make Your First Hire As a UK Company

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Making your first hire is one of the most daunting but necessary steps to growing your business.

New companies often make the mistake of delaying their first hire because they worry about the additional tax responsibilities that they will have to carry when they become employers.

Here we will break down exactly what these obligations are, how to factor them into your hiring budget and process, and what extra administrative tasks you will have to do to stay compliant with employers tax laws.

We’ll also talk about how you can reduce the tax burden of hiring local full time staff and make the administrative side of employment as easy as possible.

Please note that this guide relates to UK tax laws. Employers’ tax obligations will be different in each country (and differ between states in the USA).

Overview of UK Employers’ Tax Obligations

Before we go into the details of exactly what you need to do tax-wise when hiring your first employee, let’s go over the different employment taxes and laws in the UK.

  • PAYE: This stands for Pay As You Earn and is the system that the government uses to collect income tax and National Insurance Tax. Employers are responsible for making sure that their employee’s income tax and National Insurance tax are deducted from their salaries.
  • Employer’s National Insurance Tax: Employer’s National Insurance tax specifically contributes to your state pension which you receive at 66. An employer has to pay 13.8% of a full time employee’s salary regardless of what they earn. Employer’s do not have to pay this if their employees earn less than £758 a month (this is about 60 hours a month on minimum wage).
  • Pension scheme: All UK employers must offer their staff a pension scheme by law. An employer must pay 3% of their employee’s annual earnings into their pension as a minimum. This is cut off at £50,270 a year, so you’d have to pay the same pension contribution to an employee earning £50,000 a year as you would for an employee earning £100,00 a year.
  • Income Tax: This is tax based on how much your employer earns. At the time of writing (September 2024) the first £12,570 of an employee’s salary is not subject to income tax, £12571- £50,270 is subject to 20% income tax and any annual earnings over £50,270 is subject to 40% income tax. Bear in mind that this comes out of an employee’s payslip, but you have to make sure that this happens.

What About Taxes On Bonuses and Commission?

Bonuses and commissions are taxed in the exact same way as base income and are taxed on a month by month basis.

If an employee’s base salary is in the 20% tax bracket, but their bonuses put them in the 40% tax bracket, then any income that they earn over £50,270 is subject to 40% income tax.

In short, a lot of the loopholes around bonuses that existed in the early 2000’s (and some people would argue contributed to the 2008 financial crash) have been closed. 

Employee’s can’t earn tax free commission (anymore).

Now that we’ve gone through the basic laws and jargon around employers’ tax obligations, we’ll go through step by step what you have to do to make sure you stay tax compliant when hiring staff.

  1. Register With The HMRC as An Employer

We recommend registering with the HMRC (the government department that deals with taxes) eight weeks before you plan on making your first higher.

To register as an employer with with the HMRC you must:

  • Be a limited company (as opposed to a sole trader)
  • Get your Government Gateway Account (you can do that here)
  • Sign in to set up an employer’s account here using your Government Gateway and password
  • Say which taxes you will need to pay (you’ll see an image of the check box options below
  • Give your business address and you’ll be sent an activation code
  • Log back into your employer’s account and use your activation code to register as an employer.
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These are the tax options you can register for 

The whole process should take 3-5 working days (it’s the government – they’re slow).

  1. Working Out Your Hiring Budget

Working out your hiring budget is relatively straightforward – you just need to pay 16.8% more than whatever salary you are offering.

13.8% of this is made up of Employer National Insurance Rates, and then 3% of this is made up of mandatory pension contributions.

Bear in mind that it’s not uncommon for companies to offer a higher pension contribution. 3% is just the minimum in the UK.

The big take home here is that your additional tax contribution percentage does not change regardless of how much you pay your staff.

There are no tax bands like there are for Income Tax and Employee National Insurance Tax.

To put things into perspective here’s how much it will cost you to pay for:

  • A junior on £25,000 per year: This will cost you £34,500 per year.
  • A team leader on £60,000: This will cost you £82,800 per year.
  • A director on £100,000: This will cost you £138,000 per year.

Please bear in mind that this does not include common but non-necessary perks like health insurance.

  1. Managing the Administrative Side of Employers’ Tax

The process of paying employees and managing all their tax deductions is called “payroll”.

Now, for companies that hire more than a handful of employees I would strongly recommend outsourcing payroll, as messing it up can result in heavy fines, but you can do it yourself if you only have one or two members of staff.

If you’re going to go down the DIY route then at the very least you will need some sort of payroll software

If you have fewer than 10 employees then the UK government offers a free payroll software. 

This will do the job of ensuring that:

  • Your staff are paid on time
  • All necessary tax deductions come out of their payslip and that the payslip says what and why these deductions are
  • You pay your employers’ tax
  • Its deduction calculations will be calibrated every time there is a change to tax laws.
  • Annual reports will be sent to the HMRC 
  • You can print off P45, P60 and P11D forms whenever you want

The payroll tool is surprisingly good, with its main weakness being the fact that it can only handle ten employees at a time.

If you have a larger team and you still want to run your own payroll then here’s a list of the best payroll softwares for small businesses.

Are There Any Ways to Simplify Payroll?

In all honesty, running payroll for a small team isn’t that difficult, especially once you’ve got your first employee registered on your software (after that you can just use their profile as a template).

Some ways of making payroll even simpler are:

  • Having a very clear pay structure and pay grades within your company
  • Keeping discretionary bonuses to a minimum
  • Paying staff monthly (rather than weekly or bi-weekly)
  • Giving staff limited access to your payroll software so they can manage things like absences and sick leave themselves (some more advanced payroll softwares offer guest/user/administrator access).

The most time consuming process in running your own payroll is making changes to an employee’s benefit scheme (you can’t say no if an employee asks you to increase how much they personally put into their pension scheme).

This usually involves a 60 minute phone call (most of this time will be spent on hold) with your pension provider or a few days of back and forth emailing with them.

Are There Any Tax Efficient Ways to Reward Staff?

As you can see, the amount of tax that you have to pay as an employer is a direct function of the employer’s salary.

This means that increasing an employee’s salary will also increase the amount of tax you have to pay.

So it’s worthwhile having a few ways of rewarding staff that don’t increase the amount of tax you pay.

Here are some options

  1. Be As Transparent As Possible About Take Home Pay

Jobseekers, especially entry level jobseekers, get very frustrated about the lack of transparency that companies offer when it comes to the compensation listed on job adverts.

While it’s not uncommon to see salaries listed, companies can go a step further and actually show what your estimated take home pay will be each month.

I say estimate because things like student loans can affect your take home pay, but at least you can say how much an employee will take home minus income and National Insurance tax.

This gesture shows candidates that you actually care about their financial wellbeing and can allow you to potentially punch above your weight even if you can’t quite offer the salary of larger companies hiring for similar roles

  1. Provision of Food at Work

You can provide free or heavily subsidized food for work and claim that off your company’s profits so long as:

  • All employees are given the option of free/subsidized food.
  • The food must be made at a canteen (as opposed to being ordered out at a restaurant).
  • Food must be provided during working hours (after work snacks would not be tax-deductible, for example).

The law is unclear whether remote workers can order food at the company canteen and have it delivered to their home. They definitely cannot have a third party delivery company deliver this food as this would be classified as ordering food out which is not tax deductible.

  1. Employee Share Schemes

As of the time of writing (September 2024) you can give your employees up to £3,600 free shares every tax year.

Employees may have to pay capital gains tax on those shares once they cash them out, however.

  1. Staff Parties

You can spend £150 per head per year on staff parties. This includes money spent on alcohol.

Most companies choose to spend all this money at once on a Christmas party. £150 a head on two events isn’t going to get you very far unless you have a small team.

  1. Small (“Trivial”) Gifts

The UK government allows for employers’ to give their staff “trivial benefits” tax free.

Charlie Bailey, Co-Founder of accountancy firm GoForma says: “trivial benefits are gifts under £50 given to an employee or their family that are not cash or cash vouchers.”

Gift cards, food and drink, and inexpensive household items can all qualify as trivial gifts.

Small companies (companies with 5 or fewer shareholders) can only give up to £300 of trivial benefits in a tax year. Larger companies can give employees an unlimited number of trivial benefits as long as each individual gift does not exceed £50.

Summing Up

The tax obligations of UK employers of full time, local staff is simpler than you’d might imagine.

Employers need to pay 13.8% tax on each employee’s salary to cover their National Insurance and pension contribution. Smaller companies can also run their own payroll which, if automated properly, can only take a few minutes a week.

Employers need to register as an employer to make themselves eligible to pay employers’ tax, however if you have registered as a limited company with yourself as a director then there’s a good chance that you have done this already.

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About the author: Charlie Bailey

Charlie Bailey is the co-founder of GoForma, an accounting firm for start ups and small businesses

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