The tax and benefit implications of hiring your first team member

Taking on employees is an exciting development in the life of a business. But it comes with a myriad of responsibilities for the founder, who will hopefully have the support of a great accountant.

In this blog, I share advice on what to think about if you're ready to take the next step on your entrepreneurial journey and hire an employee.

So, you've reached the stage where you need help and there is no way of working harder than you already do? Cue taking on staff, technically known as employees, to share the load. But what are the considerations and, more importantly, the legal responsibilities of employing for the first time?

Find the right fit for your company

Ask yourself whether you need a full-time or part-time person, whether you are happy for someone to have more than one job or whether you need someone that's fully committed.

Consider the level of experience required as this will drive the expected pay. Calculate what the company can realistically afford to pay an employee and factor in the statutory benefits you have to provide when taking someone on.

PAYE or self-employed?

There are essentially two ways of engaging staff to work with your company. You can put them on an Employers' PAYE scheme (known as a payroll so they are 'employees') or engage self-employed subcontractors who are responsible for the management and payment of any income tax and national insurance due to HMRC.

HMRC govern the employers' PAYE scheme and your company or its adviser will need to set a scheme up, obtaining a scheme number.

It requires certain information to be filed every time an employee is paid, now commonly known as RTI filing, and for income tax and national insurance to be collected from the employee and paid over to HMRC on a monthly basis. There are of course penalties for not complying with these requirements.

The payment to HMRC comprises three main elements: employee Income Tax, employee National Insurance and employer National Insurance. It is important to manage company cashflow to ensure these payments can be made on time to HMRC.

Employee benefits

Employees are entitled to certain benefits such as holiday pay, sickness pay, and hours and breaks in line with the working time regulations.

It is advisable to have a contract of employment in place with your employee that sets out company policy for the benefit entitlements that also extend to maternity and paternity pay and leave to name but a few. The contract should also speak about the duties the employee is expected to carry out, the hours expected and so on.

You will need to ask your employee for a P45 form from their previous employer or to fill out a P46 form or 'new starter form' as this information will be needed to get their tax contributions right.

The employee needs to be given a document called a payslip each time they receive payment that will detail the amounts collected and paid to HMRC on their behalf and state the amount they should expect to receive in their bank account.

If someone wishes to work for you on a 'self-employed' basis rather than as an employee it is important to review whether they actually meet HMRC's criteria for being an employee. The danger is that HMRC can pursue a company for employee taxes if they should have been on an employers' payroll scheme and not hired as a self-employed person.

HMRC have a tool to help check whether someone should be employed via an employer's PAYE scheme or can be engaged by the company as a self-employed person.

Auto-enrolment

Employees earning a salary above a certain limit must be enrolled in a pension scheme to save for their retirement. They have the option to opt-out of the scheme if they do not wish to participate but the employer has a duty to manage this process through for them.

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Relevant resources

• Small business taxes: A guide

• How to fund your start-up with the tax system

• How to minimise the tax you pay on your business profits